FTSE mettle is tested by slump in commodities

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HE markets settled into the first full week of trading of the year, the FTSE had its 2013 bull run checked, dropping 17 points yesterday.

The commodity and miner-heavy benchmark index had been pushed to multi-year highs by the effects of a global risk-off sentiment, with the FTSE breaking the psychologically significant 6,000 level for the first time since May 2011. As tensions mounted during the congressional stand-off over the US fiscal cliff during the later part of 2012, investors sought safety in precious metals and commodities, which were given additional strength by a weakening greenback. As global faith in the ability of the US to deal with its fiscal woes took a slide, so did the purchasing power of the dollar, with dollar-denominated commodities a major beneficiary.

But with US politicians coming to a compromise on the package of tax increases and spending cuts which many cited as a threat to US GDP, investors began to unwind their risk-off positions at the expense of commodity prices and mining stocks – yesterday Fresnillo shed 2 per cent, while Antofagasta 1.6 per cent.

It was only Britain’s banks – given a boost by news that increases in liquidity requirements would be delayed – that prevented the FTSE from falling further. The announcement that banks would be given an additional four years to meet Basel III rules on liquidity sent Barclays surging, with a rise of 3.7 per cent on the day, with Lloyds seeing a 1.6 per cent jump. “It is certainly a sigh of relief for the banks which have been worrying for years about the impending implementation of stricter capital requirements,” says Angus Campbell, head of market analysis at Capital Spreads. Campbell adds: “It is actually quite encouraging for the wider economy, as it should improve the flow of credit to businesses and consumers.”

With a week of earnings reports from retailers ahead of us, it is likely that the FTSE’s gains will continue to be checked. WM Morrison lost half a point yesterday when it reported a 2.5 per cent year-on-year drop in December sales. This disappointing result contrasts with the upbeat reports from Next and John Lewis last week, and will have traders eagerly anticipating the third quarter and Christmas trading statement due from J Sainsbury tomorrow, as well as the third quarter statement from Marks and Spencer on Thursday.

The bullish trend for large cap equities in 2013 is still intact, but nevertheless there may be some upsets along the way.