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Boosted by gains in the oil sector yesterday and buoyed by the healthy upside in US markets, the bullishness in the UK benchmark evaporated somewhat in afternoon trade. UK GDP showed that the economy had grown at a weaker pace than first thought, with the Q3 number revised down to 2.6% from an earlier estimate of 3.0%. The widening of the current account deficit, something of a constant headache for George Osborne, has also tempered some of the risk appetite.
Oil prices have once again come under pressure. The index remains steadfastly anchored to the 6600 level. Serco Group continues to build on yesterday’s gains, adding a further 3.8%, while Polymetal International pared some of yesterday’s upside with the share price falling almost 3%.
With the Greek elections also presenting something of a fly in the ointment, and the usual uncertainty that accompanies such an event, the exuberance in US markets lacks the necessary contagion to target new highs in either Germany or here in the UK.
The S&P 500 notched up its 50th record high of the year on Monday, but with the strong momentum aided by low trade volumes and the phenomenal Santa Rally, only the extremely deluded bear would have ruled out additional highs in US stock indices.
It’s often said that the stock market is not a true reflection of the economy, yet the fact that US GDP rocketed higher in the third quarter, at an annualised increase of 5%, we might well revise this adage.
Rising well above the 4.3% consensus number, and recording the fastest pace of growth in 11 years, low oil prices are certainly helping to strengthen personal consumption stateside and this development has helped to usurp the UK from its lofty spot as the best performing G7 country.
The news helped to elevate the Dow Jones through the 18,000 level for the first time ever. Durable goods orders were not as impressive, falling 0.7% in November compared to the 0.3% rise reported for October, which doesn’t necessarily bode well for Q4 with respect to growth.
When the Saudi oil minister states that no OPEC intervention will take place, even if the price of oil hits $20/bbl, one starts to query the sustainability of the recent consolidation above $60/bbl for Oil - Brent Crude prices. It also calls into question the degree of influence OPEC now has over oil prices in light of the US shale boom which has been blamed for much of the supply glut.
Gold prices, as would be expected, have continued to falter in the wake of the stellar US GDP number and the prospect of higher rates. The lack of yield from the precious metal is also in sharp contrast to the gains in equity markets, thus while below the $1180 level the bias is to the downside.
The pound isn’t having the cheeriest of festive seasons, falling to a 16-month low against the dollar. Despite two MPC members pushing for a rate hike amidst a disinflationary environment in an economy that still looks vaguely fragile, it seems the market is not pricing in monetary tightening any time soon. The weaker annual growth and fairly substantial current account deficit released today have effectively faded any investor appetite for sterling, and the positive correlation to EUR/USD moves is evident.
The recent dollar strength has also been a factor, owing to stronger data and the prospect of a rate hike being less uncertain in the US. The dollar index has now pushed above the psychological 90 marker and in spite of the fact that ‘long dollar’ is becoming somewhat crowded, it seems the contrarians remain firmly on the back foot.