The FTSE retreated this morning after less than comforting words from the Federal Open Market Committee last night brought worries over the European debt crisis back to the forefront.
The Federal Open Market Committee kept benchmark interest rates in the US at 0.25% last night and reiterated their pledge to keep the interest rate low for an extended period. The words that most traders have latched onto were ‘Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.’ This suggests a downward shift in growth expectations and a slower recovery to be expected. The press release did say that the ‘economic recovery is proceeding’ and that the labour market ‘is improving gradually’, however without the numbers to back up the statement, investor confidence continues to wane.
Obama is feeling the pressure, faced with a stubbornly high unemployment levels and the Gulf of Mexico oil spill disaster testing his popularity with voters. It is no wonder that he is putting the pressure on other nations to pick up demand in their economies as this is becoming increasingly essential to kick-start the US economy, and in turn, start to reduce the unemployment level. With elections looming in November, Obama is running out of time to demonstrate with hard numbers that he can create jobs and bring the nation out of its economic slump.
There has been increasing talk about the potential rifts emerging between President Obama and German Chancellor Angela Merkel over their differing views on stimulus versus austerity measures. George Soros has written an article for the FT where he effectively condemns Germany for their stance on implementing austerity, which he believes will exacerbate the European debt situation. However, Merkel’s argument is that reducing Germany’s budget deficit by €10 billion a year won’t hurt the German economy, and in fact may entice German’s to spend more if they feel their government ‘is taking precautions’ to ensure solid finances. Both camps have a point and it may simply be the case that different policies will work better for different countries as they inherently face different situations.
By 10:45am (London time) the FTSE 100 index was 37.64 points (-0.73%) lower at 5140.88, while the broader FTSE 250 index had declined 102.15 points (-1.05%) to 9731.01.
Fears that the global recovery may be stalling saw a broad drop in commodity prices. As a result, resource stocks dragged the FTSE lower, with Kazakhmys losing 3%, BG Group shedding 2.24% and Petrofac lower 2.2%. Heavy-weights Royal Dutch Shell, Rio Tinto and BHP fell 1.45%, 1.77% and 0.9% respectively. Investors may want to keep a close eye on the latter two miners after Australian Prime Minister Kevin Rudd was ousted yesterday after he lost support from his political party over his controversial super-tax on resource projects in Australia. The newly appointed Prime Minister, Julia Gillard, has made it clear that she will open the door for discussions on a revised proposed tax.
The Australian dollar initially rose on the news to hit an intra-day high of 0.8771 against the US dollar as traders speculated the new Prime Minister will scrap the tax which may in turn renew demand for the currency. However the gains were soon after pared as investors questioned how far the new Prime Minister would go in altering the tax and sought clarification on the Prime Ministers policies for the country in general.
The banks were all lower on the FTSE today as concerns mount over the stability of Europe’s finances and investor concerns of a European sovereign debt default creep back in. Royal Bank of Scotland and Barclays were the worst performers retreating 1.58% and 1.97% respectively. The sector is still pricing in the effect of the government’s £2 billion proposed bank levy which will be introduced in 2011.
On the FTSE 250, McBride slumped 19.08%, after the private label personal care retailer said full-year revenue growth would be flat and restructuring in the company would take place costing a one-off £14 million. The company expects the restructure to eventually deliver £4 million a year in costs savings.
