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UK stock market commentary (September 28, 2012): A glimmer of hope for the UK economy?

UK GDP figures were revised upwards yesterday by a whopping 0.1% to minus 0.4% so the double dip recession isn’t quite as bad as previously thought. Certainly nothing to get excited about but the fact that the first reading came in at -0.7% a few weeks ago really doesn’t give forecasters or people who rely on such numbers much in the way of consistency. The extra bank holiday for the Queen’s Jubilee was certainly one contributing factor to the loss of output and many expect GDP figures to show growth in the third quarter but the fact that one more day’s holiday can keep us in a technical recession is a reminder of just how fragile the UK economy is.

So many would say there are glimmers of hope in terms of GDP going forward, but in truth the UK is not much better off than the most worrisome economic circumstances in the eurozone. The situation there is impacting the UK significantly as the current account figures also revealed yesterday with exports of goods and services slumping to record lows. One of the main contributors to our economic output is financial services without which our economy would be in an even deeper recession. Bottom line is that an unhappy Europe leads to an unhappy UK and if the situation there deteriorates then we can expect it to have an even worse effect on us.

At least the Jubilee seems to have made consumers a little cheerier as this morning’s data shows consumer confidence has risen to the highest level for 15 months. Rather like the GDP numbers it is nothing to get excited about but a move in the GfK index from -29 to -28 is at least a start, especially when you consider just how appalling the wonderful British summer was this year.

But the mild improvements in the UK’s prospects are nothing compared to what’s happening on the continent and aren’t really reflected in equity markets as they continue to stick within their narrow ranges. Yesterday did see a rally at least for US stocks amid ongoing street protests in Spain. The Dow rallied following the announcement of the fifth austerity package by Prime Minister Mariano Rajoy, seen as a condition for a bailout. Additionally the equities markets were encouraged by speculation that even China is due to apply more stimulus measures to prevent a further economic slowdown. All in all, the Dow rebounded 70 points to 13,485 and this morning sees the FTSE up some 20 points to 5800. The near term trend still resembles a rather bearish market with resistance at 5830, 5850 and 5870 meanwhile support is seen at 5780/70 and 5750.

The unveiling of a Spanish austerity budget with 40 billion euro spending cuts has offered the common currency a bit of a breather yesterday. Investors were quick to add that a bailout is now just around the corner so they rushed into the euro boosting its price 40 pips to 1.2913. This early morning the euro is still on the advance taking EUR/USD to 1.2930 as France is expected to follow suit and in a few hours announced its own austerity package.

Defying protests and announcing more austerity was interpreted as a sign that a request for financial help is imminent. So naturally, concerns of inflation returning sometimes in the future made headlines and sparked gold buying as a hedge against currency devaluation. Consequently, the precious metal rose 23 bucks to 1,777 recouping the losses from the last few days.

The shutdown of a major Canadian refinery following an explosion triggered a sharp rally in gasoline which also pushed up the WTI crude prices. However, the rise of $1.77 to $91.85 was also driven by a sigh of relief in the global markets once Spain came up with 40 billion euro spending cuts for its next budget which in turn sent participants out of the safety of the US dollar.