FTSE rallies on commodity stocks but bank decline continues

The FTSE 100 saw strong gains for much of the day, trading higher by over 2% at one point before gains weakened somewhat upon the opening of US markets.

Much of today’s gains have been driven by strong demand for oil stocks, which has seen sentiment lifted by the seeming near end to hostilities in Libya as rebels take control of Tripoli. This it is hoped would help to normalize production in the region and most certainly there is also a bit of a relief rally going on here too. Oil stocks such as Royal Dutch Shell and BG Group also received a boost from a strong note from Barclays Capitol, which highlighted them as their preferred plays in the oil sector.

The miners also saw higher share price demand, with precious metals firms Randgold Resources and Fresnillo shares trading near the top of the FTSE 100 on the back of a strong broker note on the two firms. Randgold and Fresnillo shares rose between 3% and 4% though as gold prices fell off from their recent record highs as the session progressed, Randgold’s gains also contracted.

Banks put a leash on todays gains
However, continued weakness in banking stocks and fresh record highs for Gold emphasises that despite today’s gains, nervousness and caution remains. Banking stocks such as Barclays, Royal Bank of Scotland and Lloyds were the heavyweight fallers on the FTSE 100 in trading, with the FTSE 350 banking sector falling over 1% on the day and putting a leash on the amount of gains the UK Index was able to see. Clouds remain over stricter banking regulations to come from Septembers Independent Commission on Banking report, as highlighted by several British newspapers over the weekend, whilst underlying exposures to sovereign debt for broader European banks has also kept buyer interest at bay.

Whilst today’s gains for stock indices is somewhat positive given last weeks poor end to the week, the fact that the price of Gold hit yet more record highs and defensive stock sectors such as Tobacco firms also saw strong gains alludes to the fact that investors should refrain from cheering too much about todays 1.5% Index gains.

Are we opening ourselves up for a Jackson Hole disappointment?
One hopes that stock prices have not been lifted by fool hardy hopes that Ben Bernanke will announce a third stage of quantitative easing at Jackson Hole later this week as that could leave the door open for more disappointment. Not many clues has been given to the market that may justify such a conclusion thus far though undoubtedly investors will hope to hear more about what to expect from the meeting as the week progresses. That said, there is of course the chance that Bernanke could repeat last year’s antics, when he gave the markets indications that QE2 was set to begin, and the Fed Chairman rarely disappoints the market. However, heightened expectations could make any disappointment much harder to bear and this could be troubling for stocks should that disappointment come.