The FTSE 100 Index continued to build on Friday's gains this morning, as an overnight advance in Asian equity markets and higher Wall Street futures encouraged bargain hunters back to the stock market.
By 11.30am (London time) the FTSE 100 Index was 30.21 points ( +0.59%) higher at 5193.89 while the broader FTSE 250 Index was 109.76 points (+1.14%) above its previous close at 9772.35.
Miners added the most points to the FTSE this morning following a rally in base metals. Mexican silver miner Fresnillo was the sector's best performer, up 5.2% to 1061p followed by copper miner Kazakhmys, which advanced 3.5% to 1174p. July silver futures were 1.15% higher at $18.445 while July high-grade copper futures rallied 2.5% to $2.9775 per pound.
Oil and gas producers were somewhat mixed, however, with Cairn Energy, Shell and Tullow Oil only marginally higher, as sharp losses in BP limited the sector's gains. BP tumbled 6% this morning to 368.35p on fear that the company will decide to halt dividends after US authorities suggested it set up an escrow account to pay for the damages caused by the Gulf of Mexico oil spill disaster.
A strong revival in risk appetite and hawkish comments from BoE policymaker Andrew Sentance helped sterling rally over 1% against the US dollar to $1.4705 this morning. Mr Sentance told the Sunday Times newspaper that Britain's economic recovery and resilient inflation called into question how long a highly expansionary monetary policy would remain appropriate. Meanwhile, the BoE's chief economist Spencer Dale believes the UK economic recovery is likely to accelerate this year and highlighted a risk that inflation could remain above the central bank's 2% target for longer than expected.
Although this could signal that the BoE is prepared to raise interest rates later this year, I believe their comments mainly suggest that the UK economic recovery is strong enough to sustain fiscal tightening. An increase in taxes will mitigate some of the expansionary monetary effects and at the same lower the country's burgeoning deficit. As I said in my previous commentaries, you can’t tighten monetary and fiscal policies together without severely jeopardising economic growth. The focus from here on will be on fiscal austerity and the lowering of the budget deficit.
As a matter of fact sterling held onto its gains against the dollar, after a report from Office for Budget Responsibility (OBR), Britain's new independent budget watch dog, said it expects the UK budget deficit for 2010-2011 to be £155 billion, down £8 billion from the £163 billion deficit shown in the March Budget. The OBR's deficit projections for 2011-12 were also more favourable at £127 billion - £4 billion lower than earlier forecasts.
The Office for Budget Responsibility (OBR) lowered the forecast for UK growth, however. It expects the UK economy to grow at a rate of 2.6% in 2011, lower than the 3.25% average growth forecast shown in the March Budget. In addition, growth projections for the subsequent three years were lowered to an average of 2.7%. This is 80 basis points lower than the 3.5% average growth forecast shown in the Labour party’s recent Budget.
Looking ahead, there are no major UK or US economic releases scheduled later today. Meanwhile, June Dow and S&P 500 futures trade higher, suggesting that Wall Street is currently expected to open in positive territory this afternoon.
