Market speculation on FOMC and Iran military action lifts FTSE but Merkel ESM comments triggers late Euro and stock sell off

<p>Market speculation that the Federal Reserve could hint towards the start of QE3 in tonights FOMC decision, triggering some investor optimism in the process, and […]</p>

Market speculation that the Federal Reserve could hint towards the start of QE3 in tonights FOMC decision, triggering some investor optimism in the process, and rumours of Iran closing the Straits of Hormuz for a potential military exercise lifted heavyweight oil stocks in London trade, pushing the FTSE 100 higher as much as 1.8%.

However, comments from coalition sources within Merkel’s ruling party that the German leader would reject raising the €500bn upper cap on the permanent bailout fund, the ESM, sent stocks and the euro in a tailspin towards the close, forcing the FTSE 100 back to 1.1% up on the day.

Merkel’s comments are ill timed and do little to help convince the market that real progress was made at last week’s EU Summit when it is clear that Germany continues to refrain from making concessions on increasing the immediate size of bailout funds.

It’s been a day of high rumours and choppy trade with the FTSE 100. We can attribute much of the FTSE’s strength today to market rumours and speculation as opposed to fundamental strength in investor sentiment. Regardless however, its been a positive session despite Merkel’s comments late on, though the fact that investors are so willing to react to speculation emphasises just how on edge traders remain in what is essentially a headline driven market right now.

Merkel’s comments sent the euro sharply lower, losing as much as 124 pips within a matter of minutes against the US dollar, with correlated weakness in stock indices across Europe going into the close.

Oil stocks saw the most gains on the day on rumours of Iranian military exercises in the Straits of Hormuz, and given the heightened tensions with the US over the captured military drone, the move, if true, could been seen as posturing by the Iranians. Nevertheless, the rumour triggered a sharp rise in the price of crude oil, with Nymex crude oil rising 2% on the day and this gave a correlated lift to heavyweight oil stocks on the FTSE such as BG Group and Royal Dutch Shell, who rose over 2%. The Straits of Hormuz is seen as an important shipping channel for oil and so a potential closure could have large short term effects to oil supply.

Given the heavyweight bearing oil firms have on the FTSE, we can locate much of the FTSE’s strength today here.

Miners also saw gains on the day despite a small fall in the price of Copper, with the FTSE 350 mining sector gaining near 1% on the day.

Somewhat poignantly, defensive asset classes also saw strong gains today, with tobacco, pharmaceutical stocks and the US dollar gaining strongly, emphasising that investors continue to recycle the bulk of the funds into safe haven asset classes as they start to take a leave of absence for the year end.

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