FTSE 100 Gains Only Limited Support from Oil Price Surge

Although the strong increase in oil prices provided support to UK equities, the positive impact was offset by higher bond yields, declining metals prices and concerns surrounding the financial sector.

The UK index was unsettled in early trading by the Bank of England Stress Test results as the Royal Bank of Scotland failed and will need to raise additional capital. There was also a generally cautious tone in the latest Financial Stability Report which contributed to a defensive tone in the financial sector.

Despite a generally solid tone in Asian markets, the FTSE index opened slightly lower. Oil prices had a very important direct and indirect impact on the UK index during the day as OPEC held its crucial meeting in Vienna.

Soon after the European open, there were was positive rhetoric from Iran that there would be a deal. The positive tone was sustained during the European session with reports that there would be an overall cut of 1.2mn bpd.

There was a surge in prices of over 8% from the Tuesday close as Brent crude moved well above the $50.00 p/b level and the sharp increase in oil prices provided a firm boost to the UK index.

There was, however, downward pressure on precious metals as the dollar gained renewed support against major currencies. The net impact of changes in oil prices was still notably positive and the UK index pushed to highs around 6,840 ahead of the US open.

There was a stronger than expected reading for the ADP employment index of 216,000 for November, although there was a downward revision to October’s data at 119,000 from the 147,000 reported originally.

The later US economic data releases struggled to gain any traction in the market, although the stronger than expected reading for the Chicago PMI index boosted confidence in the manufacturing sector.

There was further upward pressure on gilt yields during the day which had some unsettling influence on equities and there was a sharp Sterling advance against the Euro in very choppy currency markets.

Higher yields pull the UK index from its highs as gains in global markets also faded slightly with a slide in precious metals important in undermining support. At the close, there was a gain of 11.79 points and 0.17% at 6,783.79.

Developments surrounding the energy and currency markets will continue to have an important impact on Thursday and the UK PMI manufacturing data will also be monitored for further evidence of industrial trends.

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Tim is a contributing author to EconomicCalendar.com. He is an economist and has been involved in financial markets for over 20 years as an analyst. He specialises in global economic trends, macro policy and central banks. Extensive knowledge, experience and data mining is used to anticipate trends in equities, bonds and forex with a contrarian slant. He is a graduate of the University of York with a degree in Economics/Econometrics.