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UK stock market comment: Markets in panic mode (November 10, 2011)

Fear is gripping investors at the moment as the eurozone debt crisis seems to be getting out of control.  Politicians in the US are now trying to calm nerves by saying that their exposure to Italian debt is wholly containable and that their banks will be able to weather the storm in the event of any default.  This has washed with the markets which were in sell mode throughout last night’s session in New York and this morning it has followed through to European indices.  For the FTSE we’ve been calling it to open below the important support level of 5400 throughout the night and at the open we’re trading at 5360.  This breach of 5400 is worrying for the bulls who’ve been citing this as the previous resistance following August’s correction and that it had turned into a major support level, so now the focus is going to be on the 5330/00 and 5270 area and then of course it’s the major low around 4800.  The bears seem to be very much in control of proceedings and if the fear grows we could be testing the resolve of these support areas.

The reality that European leaders are now talking about the possibility of a break up of the eurozone is also enough to make markets incredibly nervous of just how a new block of nations might look.  One thing is for certain and that’s that the euro experiment hasn’t worked in its current form and if the political will is there to save it then the biggest bazooka of them all, the European Central Bank, will need to be used in order to have any chance of preventing the contagion spreading to the big beasts of the eurozone.

Once again desperate attempts to prevent the share prices of banking stocks are being extended by French authorities by extending their ban on short selling for a further three months.  This morning their banking sector is down by well over 1% and almost 60% over the year, so if ever there was an example of a failed policy this is it.

Economic data today comes in the form of the Bank of England’s interest rate decision where things are expected to stay on hold after having extended quantitative easing last month.  After their claims that the first round of QE helped to boost GDP the pressure will be on them this time for their actions to have a material effect on UK growth and job creation.  For people on the street the real worry is rising prices and unfortunately whilst QE might give a boost to GDP, we’ve seen that it is only short term and it also puts pressure on underlying inflation.

Currency markets were in defensive mode yesterday and this morning things are just a little flat on the whole.  The euro suffered a big sell off yesterday in line with equity markets taking EUR/USD down to below 1.3500 but this morning is has found a little bit of support around here and so a small bounce is ensuing as we are at 1.3540 at the time of writing.  As the crisis in Europe continues to unfold the single currency remains the whipping boy of the FX markets.  On the hourly chart it looks like a bit of a head and shoulders pattern has formed which could signal further weakness and we might test the lows around 1.3200.

Even though gold is considered to be a safe haven it hasn’t managed to capitalise on the recent turmoil within the markets.  Rejecting 1800 only a couple of days ago has seen it retrace back to 1760 at the time of writing.  The uptrend remains in tact and so bulls are probably sitting on the sidelines waiting to dip back in again as this little bout of weakness could present them a buying opportunity.

Crude prices have also suffered selling in line with the risk off trade of the past few days. Just when Brent looked like it had made a little break out to the upside the market turns negative again showing that for any traders who’ve been opposing any recent rallies and falls would have done rather well as markets stick within relatively narrow trading ranges. This morning Brent is at 112.40.