Risk appetite returns as FTSE reaches May highs

The calm following yesterday’s storm in the UK has seen the return of traders and indeed risk appetite, helping to push the FTSE 100 to highs last seen in May.

The bullish sentiment, aided and abetted by poor US data, indicates that traders are kicking any notion that the US Federal Reserve will taper into the long grass for now.

European markets

An impressive quarterly earnings report from BP was one of the main reasons we saw gains today. The company has been beset by compensation claims and suffered huge reputational damage in the wake of the Gulf of Mexico disaster. Q3 consensus estimates were surpassed and news that patient shareholders are to be rewarded with some of the proceeds of the imminent sale of assets has seen the company shoot to the top of the index.

The pullback in gold prices has seen the mining sector out of favour today, with Evraz and Fresnillo registering losses.

The DAX has been anchored around the 9000 level today and the shocking Deutsche Bank earnings have clearly kept the German benchmark from adding to the recent record highs. A 98% drop in profit, mainly due to an increase in litigation provisions but also hampered by a decline in trading income, saw investors show a large degree of aversion to the financial sector today.

US markets

The data today from the US only served to underpin the herd view that any Federal Reserve scaling back of current asset purchasing is a distant dot on the horizon. In light of the recent government shutdown, expectations were on the low side when it came to retail sales data for September as well as US consumer confidence, yet the actual data still succeeded in disappointing the markets. Given how the consumer accounts for around two thirds of the US economy it would seem that recent data, including the three-year low in existing house sales yesterday, is implying a slowdown in the US recovery story. The Dow Jones is trading up 45 points at 15,615.

FX

The European Central Bank have clearly given up trying to talk down the single currency. This was evident from ECB council member Ewald Nowotny extinguishing any speculation that negative base rates were in the offing. He also admitted, most likely to the admonishment of ECB chief Mario Draghi, that the ECB was running short on tools to weaken the euro. Despite a degree of dollar strength creeping back into the market earlier this morning, this has had the effect of seeing the euro retake the $1.38 level against the greenback. Any moves through the 1.3833 (this week’s highs) will set the pair on a trajectory to $1.40.

News that UK mortgages in September beat expectations gave the pound a small boost in early trade. This may well add to the notion that the UK property market is displaying ‘bubble’ characteristics.

Commodities

The implications for gold from the current form of US economic data points towards a continuation of the Fed’s policy of printing US dollars. The pullback witnessed today can ultimately be attributed to profit-taking and as long as the $1325 level holds firm, we can expect to see higher prices in the short term.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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