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UK stock market commentary (September 10, 2012): Markets take time to reflect on recent strength

After last week’s euphoric buying spree across global indices markets are in respite mood this morning as they contemplate the chances of the US’s Federal Reserve taking similar action to the ECB by providing the world’s largest economy with more stimulus. There’s no question that the US economy is slowing and Friday’s non farm payroll proved that once again with far fewer than expected jobs being created. The figure of below 100k came as a disappointment and there were downgrades to previous employment figures, but rather than attracting sellers the US indices remained well supported as investors looked ahead to this week’s Federal Reserve meeting. There was also a big spike higher in the price of gold which rallied significantly straight after the release and if ever there was a market that was a measure of sentiment towards more or less stimulus then this is it.

But some good news for the US and in particular President Obama was that the unemployment rate fell to 8.1%. As Ben Bernanke has continually been consistent in telling us he will act if needs be to flick the switch for QE3 but as his comments at Jackson Hole would suggest, things aren’t quite bad enough yet to throw the kitchen sink at it. US retail sales remain strong, in particular when compared to over this side of the pond and the fortunes of their housing market are changing for the better. With commodity prices having spiked recently the threat of deflation simply isn’t as great as it was, at least in the short term.

So the bad employment number from the US did not prevent the Dow Jones from reaching its highest level since December 2007, closing just over the 13,300 level, a mere with 17 point gain for the session. As already mentioned, the big risk event of this week is Thursday’s FOMC meeting which will undoubtedly be the focus for any hints on easing the monetary policy. There’s also the German constitutional court ruling on whether the European bailouts are legal which is going to be a focus for investors too, but here the decision, which is expected on Wednesday, is unlikely go against the euro project. This has the potential to add further fuel to the bulls fire.

This morning the FTSE is a few points in the red having already been in positive territory. Traders have just been put off balance somewhat by disappointing Chinese data overnight. Clients remain short overall expecting the strength to fizzle out soon, but considering the strength behind last week’s rally this would seem like a brave position to hold.

The euro posted a sharp rise on Friday, largely on anticipations the Fed will follow the ECB and act to kick start a sluggish economic growth. The trigger sending participants out of the greenback was a weaker than initially estimated jobs expansion after Ben Bernanke expressed ‘grave’ concerns about the employment sector earlier on. So the EUR/USD pair rallied 184 pips to 1.2815, not so much on a stronger euro per se but on expectations of another round of dollar devaluation. This morning the FX markets are calm and EUR/USD is at 1.2790 at the time of writing.

Having seen a steep retracement during the early hours on Friday, gold reversed course after the nonfarm payrolls figures were released ending the day up some 34 bucks to 1735.40. It was the classic explanation of devaluation in the US dollar consequence of an increased likelihood of monetary intervention, sending investors into safe haven assets.

Ironically, despite the disappointment over the US employment report, the WTI crude prices gained 17 pips to $96.42 a barrel. Energy investors mirrored the global markets participants and interpreted the numbers as a sign that will push/ force the Fed towards QE3. However, there was also some speculation of a possible release of some emergency oil reserves which should heighten the supply thus restricting any significant price increase. After all, the US will have elections in two months time.