Another choppy session for the FTSE after UK growth is downgraded

The FTSE 100 endured another choppy and rollercoaster session after the Bank of England sharply revised UK growth forecasts, and unemployment hit a 15-year high.

The FTSE 100 had rallied from earlier weakness before the release of the BoE’s latest quarterly inflation report. The report itself was dire reading and whilst downward growth revisions were to be expected, the tone used was particularly dovish, as was the proceeding press conference with Mervyn King.

UK growth is now expected by the Central Bank to be flat in the fourth quarter whilst there are increased chances that growth could be below 1% through 2012.

The UK is likely to be gripped by a stagnate economic recovery over the next year as austerity measures bite and trade partners such as the eurozone suffer large economic tremors.

As soon as the quarterly inflation report was released, the FTSE 100 fell 100 points from its daily high within an hour’s trading, emphasising the concern investors have regarding the UK’s economic growth prospects, despite the potential for more stimulus to come from the BoE as a result.

More BoE asset purchases likely
On a day of dreadful economic data, where the unemployment rate unexpectedly hit 8.3%, a new 15 year high, and the BOE sharply downgraded growth forecasts, perhaps the only silver lining to take from the day was the fact that it has likely paved the way for more stimulus.

The BoE inflation report did go some way to justifying a significant increase in the amount of asset purchases as part of the second phase of quantitative easing, beyond the £75 billion added already.

The likelihood now is that with inflationary pressures receding, inflation is likely to hit 1.3% in two years time, and growth suppressed, the emphasis from the BoE is firmly in the stimulus camp, paving the way for more asset purchases of around £50 billion, which could come in February 2012.

Banks lag again
The banking sector remained a key drag on the FTSE 100, with the FTSE 350 banking sector losing 1% in trading and stocks such as Standard Chartered and Royal Bank of Scotland weighing.

More large scale intervention moves in the Italian and Spanish bond markets was not enough to force Italian 10-year bond yields back below the 7% level by the afternoon. The ECB bought a large amount of Italian and Spanish bonds in the early part of the morning session, which temporarily cooled yields, before the afternoon saw yields push back higher, emphasising the size of uncertainty in the markets and the tough job the ECB has to contain the crisis whilst European leaders get their act together.

Banks and insurance firms, the key areas of risk associated with liabilities to sovereign debt, are the two sectors that continue to see weakness and selling from investors as the debt crisis rambles on.

Countering the weakness however was gains in oil firms, with Cairn Energy and BP shares rallying over 1% and helping to pull the FTSE 100 back from its lows. The FTSE 350 oil sector rose 1% on the day.