The Stock Market Surges on the arrival of QE2

 The stock markets closed the week close to their highest levels in more than two years encouraging both the Daily Telegraph and the Mail to publish front page headlines on Friday declaring 'Share Prices Up'.  The FTSE 100 jumped more than 100 points on Thursday to hit a near 29-month high of 5859 before retrenching slightly on Friday to be up almost 3.5% for the week. The main driver was the Federal Reserve's fresh stimulus on Wednesday - dubbed 'QE2' - committing to buy $600 billion in government bonds to support the U.S. economy.  The package has heightened the appetite for risk globally with funds flowing away from traditionally defensive sectors like pharmaceuticals and foods into higher 'beta' sectors such as mining, energy and finance. The Bank of England however left its own emergency measures unchanged at this stage, resisting pressure for further quantitative easing and holding interest rates at an historic low of 0.5%.

Unsurprisingly, the markets were flush with new highs this week: 135 highs versus 30 lows indicating continued bullish intent with money flowing especially strongly into the mega caps; the FTSE 100 outperforming both the AIM Market, and the FTSE 250.  As the money flows into the big index and the Fed remains accommodative, Technical Analyst Robert Newgrosh’s FTSE 100 target of 10,000 by 2012 is looking more achievable.

The hard and the soft of it

But the weight of money isn't only pouring into the stock market.  Hard and soft commodities have continued their surge on the confirmation of QE2 with Gold, Silver, Coffee, Sugar, Cotton and Oil products all posting at least 12 month highs.  Commodity investors are betting that the increased supply of paper money will lead to a ramp in real world inflation.  So it’s no surprise to see companies specialising in their production continue to grace the new highs list from the mega cap resources and energy stocks such as BHP Billiton (LON:BLT) , Antofagasta (LON:ANTO) and Xstrata Plc (LON:XTA) to a whole swathe of smaller soft commodity producers including New Britain Palm Oil (LON:NBPO) , M.P.evans Group (LON:MPE) and Asian Citrus Hldgs (LON:ACHL) .

Across the pond,  HSBC and JPMorgan were accused last week in separate lawsuits of manipulating the price of silver allegedly via "enormous short positions", and many in the precious metals sector are putting silver's extraordinary surge through $26 per ounce down to the paring back of banks proprietary trading operations.  In tune with this, London listed silver and gold specialist Hochschild Mining Plc (LON:HOC) has continued its run along with other juniors including Highland Gold Mining (LON:HGM), Orosur Mining (LON:OMI) and private investor favourite Vatukoula Gold Mines (LON:VGM) .

The financial helter skelter

As the stock market surges, so do the listed Fund Managers, with Aberdeen Asset Management (LON:ADN) , Schroders (LON:SDR) , Hargreaves Lansdown Plc (LON:HL.) and Jupiter Fund Management (LON:JUP) all following the bull rally up as credit crunch fears recede . Aberdeen hit 191p as despite problems in the past, it looks to have benefitted from the growing popularity of emerging markets, given its credential in this area. It has also been opportunistically acquisitive, taking over assets most recently from troubled RBS. Pension Consultants, Mattioli Woods (LON:MTW), has also attained a new high at 280p, with good momentum apparent following the strength of the market, the recent acquisition of City Trustees and the Coalition Government's proposals for pension reform.

But financial sector concerns do still remain as the Irish banks continued to plumb new lows due to ongoing concerns about the state of the Irish economy. Allied Irish Banks (LON:ALBK) fell to 30p and Bank Of Ireland (LON:BKIR) was down to its lowest level since mid-2009.  A renewed rise in Irish credit default swap prices suggests that the international bond market is unconvinced that Irish spending cuts will be sufficient to resolve the country’s woes.

Amongst the large-caps, Royal Bank Of Scotland Group Plc (LON:RBS) continued to struggle reporting a third quarter loss of £1.4bn but showing a more encouraging operating profit of £726 million after adding back debt charges and the cost of government asset protection insurance. It nevertheless indicated that it expects challenging market conditions in the fourth quarter and estimated that a UK bank levy would cost it £225-250 million next year.  Meanwhile, HSBC Hldgs (LON:HSBA) indicated that its third-quarter pretax profit was “well ahead” of last year driven by a fall in loan impairments to the lowest level since early 2007. 

Austerity is painful

Another economic casualty has been UK-based defence consultancy Qinetiq Group (LON:QQ.) which fell to 101.7p. The Strategic Defence Review led to the axing of a £14bn training academy in St Athan, Wales run by Metrix, a JV between QinetiQ and facilities management giant Sodexo. The company has had to write off some £37m already spent on the project.

Investors wet themselves 

One of the surprising effects of QE2 has been the strong demand for stocks in the water sector.   Counter to the move away from defensives this week, utilities Severn Trent (LON:SVT) , United Utilities (LON:UU.) and Pennon Group (LON:PNN) have been continuing their strong run.  As FT Alphaville recently noted, the theory espoused by analysts at Evolution Group (LON:EVG) for this rise is that high inflation  boosts water sector values due to increased differential inflation - “revenue and RAV (regulatory asset value) is driven by RPI, while the inflation implicit in the discount rate (cost of capital) is usually lower than RPI” - just in case you didn't know!

The majority of stock market gains have been made over the last 50 years between September and May but it remains to be seen whether this rally can be sustained with macro-economic uncertainty fighting against the weight of Federal Reserve cash....