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Market Comment - May 11th, 2012

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So the economy is on its own again as the Bank of England ends its second round of stimulus whilst it is clearly leaving the door open for another possible round of QE later if required. 

This is almost certainly a given considering that the UK economy languishes in a recession and struggles with ever rising inflation.  The cause for concern for the BOE is that the QE is causing inflation to overshoot their target.  Inflation still remains a problem for the UK economy where it has not fallen as much as they had been expecting and remains stubbornly higher than other Western economies and so they face a nasty juxtaposition.  Whilst the decision was widely expected it gives an indication that the priority for the central bank remains inflation as opposed to growth which had been the shifting focus more recently when their remit is of course to keep inflation under control.

Now is an opportunity for policy makers to reflect on the stimulus of the past to see just what good it has done for the economy.  The BOE’s own claims are that the first round directly helped GDP, but they’ll struggle to claim that this time round.  The economy hasn’t been helped by either the global picture or the coalition’s inept tax and spending plans, but also the QE program is questionable as well.  There have been signs of confidence returning to the UK in many of the business surveys over the past six months or so, but that confidence hasn’t turned into real investment and growth yet, because the banking system remains locked up.  If you’re going to print money then it should go directly into bringing real borrowing costs down for business and consumers who are the front line of the economy.

This morning European markets are lower on the open showing how fickle yesterday’s rise was.  Headlines are filled with massive ‘erroneous’ trading losses at JP Morgan which knocked Asian markets a bit and this is affecting the FTSE which at the time of writing is 20 or so points lower at 5520.  Once again this brings into question the corporate governance of a bank and highlights further failures within the sector which is unlikely to ever be immune to such events.  Just when US banks had been nursing themselves back to health one of their biggest ones joins the ever growing list of banks that have suffered massive trading errors.

Yesterday the Dow Jones joined a global rally yesterday, recovering 23.46 points to 12,831.58 on the back of a fall in the US jobless claims figures.  It was a sigh of relief that alleviated some of the worries surrounding the employment sector.  In addition, the Fed Chairman Ben Bernanke acknowledged the challenges for the US banking system at a conference but said the banks are ‘more resilient’ – until JP Morgan came along.

Amid increasing speculation that Greece will exit the monetary union it has been confirmed the country secured its bailout funds from Europe thus managing to buy some time once more.  The news triggered a slight rise in the euro against the US dollar which ended marginally higher at 1.2935.  Nevertheless, the uncertainty over the policies of the new Greek government, when and how it will be formed still poses a significant downside risk.

Albeit at a cautious pace, buyers returned into gold market, pushing its price up and interrupting a streak of three consecutive declines.  But the gain of $2.42 to $1592.42 hardly changed anything in the overall downside trend despite some better news coming out of Greece.  Investors could now be trying to assess how long will it take for gold to be back in favour.

The timid rebound of 63 cents to $97.08 in the WTI crude prices was by and large driven by a rally back in the global equity markets coupled with a slightly lower greenback.  It might also be the case that after the steep fall from a high of $106.43, taking a breather was somewhat expected.  However, the short term trend remains firmly bearish so yet another attempt to break convincingly below $96.00 could be on the cards.

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Market Comment - May 11th, 2012

So the economy is on its own again as the Bank of England ends its second round of stimulus whilst it is clearly leaving the door open for another possible round of QE later if required. 

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