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Market Comment 19th July 2012

Yesterday’s UK unemployment figures are the first piece of good news that the coalition has had regarding the economy for quite some time now, and it's following a few months now of rising employment with the headline rate declining once again. 

This indicates that we may have reached the top of the unemployment cycle but unfortunately for those doom mongerers it’s only a blip in a longer term trend. The economic data out recently has been consistent with a flat lining economy and one where business and consumer confidence is at a low ebb. Businesses are recruiting to some degree but many are still holding back from making larger long term commitments by refraining from investing heavily in new staff. An indication of this was the rise in claimant counts yesterday and once the impetus from the Olympics is over it’s back to reality.

This is why the Bank of England continues to debate other unconventional policy measures that they could employ in order to boost growth, as well as for the second month in a row discussing the possibility of reducing the base rate from its 0.5% to er… 0%?! The major issue with taking further action to boost growth via QE or reducing interest rates is that there’s little more you can do before going into all out aggressive money printing, which would simply cause inflation to spike spectacularly. The tinkering here and tinkering there is not going to resolve the problems in the eurozone and until that situation is fixed and their economies recovery meaningfully, the UK is going to struggle. This bright spot in the employment cycle is unlikely to last and later this year we could be creeping back up towards that 3 million mark. What will be interesting is next weeks first reading of Q2 GDP which is showing a complete disconnect to the employment situation, which reiterates that the private sector might be taking up the slack from the public sector but it isn’t translating into growth.

Whilst we’ve had a few bright spots of news this week and finally we might get some resemblance of a summer in the coming days, the markets have perked up as well. The Dow Jones posted a second day of gains as technology stocks reported strong earnings. Ben Bernanke added to the positive sentiment by stating that he didn’t believe the US economy would slip back into recession although he remained elusive about more quantitative easing. The Dow gained 103 points to close at 12,909 and this has allowed European indices to add to gains from earlier in the week. The FTSE is just in the black by a handful of points and was looking to test 5700 earlier. The index now faces its test of that well know resistance area around 5700/25 and it comes as little surprise to see clients selling around this level.

Today focus will be on UK retail sales which are expected to show another rise of 0.6% month on month and then later there’s the weekly initial jobless claims from the US, more housing data and the day is rounded off by the Phili Fed manufacturing figure.

The euro edged lower yesterday although well off its low. Selling pressure initially came from reports that Angela Merkel was unsure of whether the “European project” would last, sending the euro as low as 1.2215. However, the euro rebounded as the statements were put into correct context and managed to settle at 1.2282, a mere 8 pips lower than the previous day. This morning the single currency has visited above the 1.2300 level which is where it sits at the time of writing.

Gold put in its third day of declines as Ben Bernanke maintains his lack of enthusiasm for another round of quantitative easing. Spot gold shed $10.5 to close at $1573 as traders continue to unwind the inflation hedge trade. The crucial support level of $1521 could soon be on for a test now that further monetary stimulus looks to have been kicked into the long grass.

Crude oil added to its winning streak as EIA oil inventories showed a surprise decline. Analyst’s forecast had expected supplies to have built up an extra 500k barrels on the week but instead declined by 800k barrels. The surprise drop saw September Crude Oil gain $0.63 to settle at $90.17.
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Market Comment 19th July 2012

Yesterday’s UK unemployment figures are the first piece of good news that the coalition has had regarding the economy for quite some time now, and it's following a few months now of rising employment with the headline rate declining once again. 

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