Choppy session sees the FTSE close marginally higher – Osbourne dreary autumn statement causes no surprises
City Index November 29, 2011 7:48 PM
<p>A choppy session saw the FTSE 100 swing between gains and losses of around 0.6% on the day as traders gauged a rather uneventful Chancellor’s […]</p>
A choppy session saw the FTSE 100 swing between gains and losses of around 0.6% on the day as traders gauged a rather uneventful Chancellor’s Autumn Statement, another Italian bond auction that saw yields rise sharply beyond the 7% level but was well supported, and a meeting of eurozone finance ministers in Brussels to agree the mechanics behind the EFSF, Europe’s bailout fund.
An afternoon rally, triggered by a much stronger than expected jump in US consumer confidence, helped to support the FTSE 100 and push the UK Index back into positive territory, closing at 5337 on the day, an increase of 24 points or 0.5%.
No real surprises from Osbourne
The Autumn Statement from Chancellor Osbourne raised very few eyebrows in the city and much of the weaker revisions for growth had been expected, given that they follow closely to downgraded forecasts from the Bank of England.
The Office for Budget Responsibility downgraded previous growth forecasts to anticipate that the UK would grow 0.7% in 2012, through which there is a significant risk that the UK economy could slip back into recession, particularly over the next two quarters where the UK is expected to grow an anaemic 0.1%.
This, in all honesty, is nothing new and most investors are fully aware that the UK stands on the brink of recession and that previous growth forecasts were overly optimistic by the Chancellor.
Despite the downward revisions to growth and higher borrowing costs, nothing announced in today’s Autumn Speech will dictate a dramatic loss of fiscal confidence in the UK, with UK Gilts fast obtaining the status as a safe haven investment.
The FTSE 100 and pound sterling did see a mini sell off in reaction to the Chancellor’s statement though this sell off was rather short lived, with an afternoon rally helping to push the UK Index back into positive territory after a surprising jump in US consumer confidence.
A strong performance in insurance firms provided much of the energy behind today’s gains whilst weakness in banking stocks weighed, with Lloyds Banking Group suffering the most, losing 2% on the day, mostly in reaction to the Chancellor’s declaration to increase the bank levy to 0.88% from 2012.
Eyes turn to Brussels
All eyes however remain on Brussels, where the investors await the fine print behind an expected agreement amongst EU finance ministers as to how to leverage up the EFSF.
Early calls from the Dutch finance minister that the increased EFSF still will not be big enough to contain the crisis and will require a greater involvement from the IMF, who will in turn require greater contributions from states, is likely to kick the can further down the road despite any progress made in Brussels today.
Whilst the ratification of the mechanics behind the EFSF is a welcome step in the right direction, the bailout fund still requires outside investment before it can be leveraged up to a size that investors deem as more credible to deal with the scale of the debt crisis at hand. It is hoped that today’s expected ratification by finance ministers will help to bring about a greater degree of transparency, and this may help to convince outside investment into the fund itself, specifically that of China.
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