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Market Comment 26th July 2012

To QE or not to QE, that is the question. 

One thing that is for sure is the BOE will be ramping up the printing presses once again and it won’t be long before we see more asset purchases from our central bank, but the big question on everyone’s lips is when the Federal Reserve will launch its version of QE3. The word “if” doesn’t feature as expectations of another round of stimulus are almost fully priced into the markets which is why for now they are managing to hold onto these levels. The next two Fed meetings at the end of this month and middle of September will be critical for those bulls who are expecting action to be taken, and if nothing materialises then there really will be serious disappointment.

Back to the UK and yesterday’s GDP number made for dire reading and the Chancellor is getting it in the neck again. What is interesting is that even though the headline GDP number reports negative growth, our borrowing costs remain at historically low levels indicating that the markets at least still have faith in the Coalition’s deficit reduction plans. A major drag on growth at the moment is construction and the outlook for the sector remains bleak so this is where the government can provide some sort of assistance. The global picture isn’t helping our exporters either but once the austerity measures have been implemented the country should be, in theory, in a stronger position to recover. Certainly the recent jobs data doesn’t suggest that the GDP number should have been so bad. The recent infrastructure plans announced, such as more roads and rail, are all very well but they take years to have an effect and a little more QE here and there is unlikely to help much either. For the longer term prospects of the economy things should be better once the government has trimmed the fat, but unfortunately the immediate impact is also being a real drag on output as cuts to spending is a costly exercise. It is a necessary evil as our public sector liabilities simply have to be more sustainable.

A surprise drop in the US new home sales had limited effect on the Dow Jones which managed to close 60 points higher just above the 12,600 level. Investors were instead attracted by news that the likes of Boeing and Caterpillar raised their earnings forecasts and rumours of QE3. It might have been the case of bottom picking from some participants after three straight sessions of losses and whilst the market did retreat from its highs later on, a gain is a gain. But this hasn’t translated into much impetus for European markets this morning as the FTSE stands at 5490 just a few points in the red.

Yesterday an ECB official appeared to be in favour of awarding extended powers to eurozone’s rescue fund, which in turn was a breath of fresh air for the shared currency and gave the euro a rare boost as it posted an 88 pip gain versus the greenback to 1.2147, interrupting a stream of five losing days. Giving the EFSF a banking licence is just one of the ideas being batted around, but that’s been the problem with European politicians of recent, lots of ideas but no action. This morning the single currency is trading at 1.2150 still seemingly with the bears in control, but with sentiment so negative towards the euro there could be more room for a squeeze higher.

Deteriorating economic data around the world triggered speculation the Federal Reserve will implement more stimulus measures soon, possibly followed by other central bankers. So gold investors were on high alert for another flight into alternative assets given the expected paper devaluation. As a result gold rose above the $1600 mark ending 25 bucks higher at $1605.

The US Department of Energy released its weekly inventories showing a rise of 2.7 million barrels in crude oil stocks compared with estimates of 0.8 million barrels draw. That sent crude prices down but a rally in equities coupled with a weaker US dollar overturned the bearish sentiment. Ongoing political troubles in the Middle East involving Iran and Syria have also convinced the bulls to join from the sidelines and give the WTI crude prices a 77 cents gain to $88.97. 
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Market Comment 26th July 2012

To QE or not to QE, that is the question. 

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