Spread Betting: FTSE 100 Weakens as IMF Cuts UK Growth Forecasts
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The regular Financial Markets Update from Simon Denham of Financial Spreads.
For today's update >> Financial Markets.
Spread Betting 21 September 2011
The UK Chancellor’s nerve will be well and truly tested in the coming months ahead as the IMF has slashed their forecasts for growth with their expectations for Britain’s economy to expand by just 1.1% as opposed to 1.5%.
Next year gets an even bigger downgrade from 2.3% to 1.7%.
But it isn’t just the UK that has seen their growth forecasts reduced, but every major economy across the globe with the US being the worst off seeing their 2.5% GDP for 2011 prediction falling to 1.5%.
This will make Gorgeous George’s plans for deficit reduction even harder to come by. When the plan was drawn out he was expecting growth to be around 3%, not nearer 1%. The other major problem is that without the growth the deficit can’t be reduced and so far spending has remained way above target.
At least for now the financial markets are giving the UK the benefit of doubt with our 10 year government bond yield being one of the lowest in the Eurozone.
This has helped to keep real borrowing costs in the UK down. Pressure from opposition politicians doesn’t help (unfortunately that’s their job) but for now at least the Chancellor’s resolve remains steadfast.
If he starts to say “oh we were going to cut government spending by this much, but now were only going to cut a little bit”, the bond markets will punish him. If you have bought in UK debt on the premise that the government will get its house in order, but then they change their mind then you will not be an investor in that debt for much longer and if you are, you’ll demand a much higher rate of return on your bond.
This would see the UK start to go down the route of Italian bonds and Spanish bonds. We’ve seen in the past that borrowing more and adding to an already massive mountain of debt is not the answer to sluggish growth.
PSNB figures out today will show that government spending jumped in August after being flat in July and once again show just how hard it will be for the coalition target to meet its spending target this year.
Later on tonight the Federal Reserve will announce its interest rate decision and the market is hoping for some sort of stimulus package, whether that comes in the form of QE3 or the so called “Operation Twist” whereby the Fed sells shorter dated bonds so they can buy longer dated ones to bring their yield down.
For now the FTSE 100 is unsure whether to fall on the side of the angels or not but is down some 20 points at the time of writing.
The ominous 5,400 level is staring UK spread betting traders in the face who continue to seem reluctant to take the index above that level.
With equities staying strong yesterday, the bulls were out and traders increased their risk appetite.
There was no real news that we didn’t already know about the Eurozone or Greece and so the single currency was given a bit of breathing space and managed to post a decent gain against the dollar.
Having said that, we know how easily fundamental news can shift traders’ mindsets and don’t forget that these are extremely jittery markets. Despite its jump yesterday, the euro is trading down at $1.3674 against the dollar and technicals could be suggesting more of the same.
The EUR/USD spread betting market stands below a strong resistance level at $1.3676 so traders should be cautious here.
Bargain hunters did not wait for gold’s lower support of $1,750 yesterday before jumping into the safety haven, helping the metal claw back some of the previous session’s losses.
Most market participants will be looking at the FOMC meeting this evening. At time of writing, the precious metal is trading up on the day at $1,812.0.
Crude oil was given a chance to breathe yesterday as global markets saw little movement.
Without any negative news being released, stock markets were given a chance to regain their balance and the area of little resistance was on the upside, even with the dollar showing weakness against the Euro.
Although eyes will be on the inventory numbers this afternoon, the main crude oil drivers are, for the foreseeable future, macroeconomic indicators. At time of writing Brent is trading at $110.76.
The above comments do not constitute investment advice and neither Financial Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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'Spread Betting: FTSE 100 Weakens as IMF Cuts UK Growth Forecasts' edited by SD, updated 21-Sep-11
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