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UK stock market commentary (September 17, 2012): Can markets now make it to new highs?

After a euphoric week where equities enjoyed substantial gains a little bit of a reality check is just bringing a few investors back down to earth this morning. Following on from Ben Bernanke’s announcement last Thursday that he was effectively just going to print more money for as long as it takes which got the bulls aggressively buying into stocks, a few profit takers are creeping in this morning. Those buyers who piled into the equity markets at the end of last week will have done so in the belief that this has marked the start of what could be a rally into the year end and with US indices only a few percentage points from their all time highs it is understandable why many investors hold this bullish view.

In the run up to last Thursday’s big Fed announcement there are quite a few people who were of the view that the US economy was in decent enough shape for it not to warrant any further QE at all, so the fact that investors got a whole lot more that they had expected means that another recession in the world’s biggest economy is highly unlikely. Yet questions still remain about the returns that are being had from such unconventional monetary policy. Considering the amount of money that’s been thrown at the problem has it really done enough to help unemployment? Mortgage rates in the US still remain stubbornly high, as is the case here in the UK as banks across the globe are simply being very reluctant to add further risk to their balance sheets by lending more. Certainly here in the UK it is very questionable as to just how much QE has helped.

Going into the final quarter of the year it will be all eyes on the economic data to see whether the actions taken by central banks are actually doing what they are supposed to do. Now that the economies are pretty much on their own having now received a helping hand from central banks, investors will want to see their actions turn into actual jobs and growth.

As mentioned the FTSE is taking things in its stride this morning as traders are taking a little bit of profit following the strength of the last couple of days. Trading at 5900 at the time of writing the index is just in the red but better than we had expected it to open by some 20 points or so as earlier we had been calling it around 5880. Things are very quiet on the economic data front today and so we might just see the markets drift sideways for the time being.

We saw a risk-on day again last Friday as investors continued to sell the US dollar and rushed into the shared currency instead, pushing it 144 pips higher to $1.3130. The fact that the European Central Bank also expressed its support for a bond buying program mid week (in essence a monetary easing policy) was of lesser importance as it became ‘old news’. This morning EUR/USD is at 1.3100 just seeing a little bout of weakness rather like equities are. The next targets for the bulls are near term resistance seen at 1.3170 and 1.3205.

Gold edged higher on Friday, bolstered by a lower greenback and worries of paper currency devaluation considering stimulus measures on both sides of the Atlantic. The precious metal reached an intraday high of $1777 and despite some late profit taking, still ended 3 bucks up to $1769.60 and judging by bulls’ appetite this early morning it would take courage to sell into the rally.

The demand for hard assets triggered by the QE3 sent participants into crude oil pushing its price above the $100.00 mark briefly. Overall the WTI crude gained 96 cents to close at $99.00 helped also by an escalation in the Middle East and North Africa protests. The short term trend has turned bullish again last week with the market prices now comfortably above the moving averages.