5/21/09

Markets fall as growth hopes fade

The FTSE has fallen and sterling weakened
Markets worldwide have fallen after Federal Reserve minutes showed the central bank has lowered its forecast for US growth.

Japan's Nikkei index ended nearly 1% lower while the FTSE 100 fell 2.1%, Germany's Dax shed 1.5% and France's Cac declined 1.4% in morning trade.

UK shares were also hit after ratings agency Standard & Poor's revised the UK's outlook to negative.

The agency cited rising public debt, which hit a record in April.

Figures on Thursday revealed that public borrowing hit a new high of £8.46bn in April compared to £1.84bn in the same month last year.

Standard & Poor's said UK debt could be close to 100% of gross domestic product, and remain at that level in the medium term.

"There are concerns finally coming through about where the underlying growth is going to come from," said Justin Urquhart Stewart, investment director at Seven Investment Management.

"We need a growing level of demand. There's a certain amount of restocking happening, and unfortunately the market has been taking that as a sign of a recovery, which it is not," he said.

'Downbeat'

Meanwhile there was more pessimism about the US economy.

On Wednesday the Fed said it expected the economy would contract between 1.3% and 2% this year.

Earlier in the year, the bank predicted the economy could contract between 0.5% and 1.3%.

It also warned that US unemployment could reach 10%.

"Minutes of the last meeting painted a downbeat outlook for global economies and the financial sector, suggesting that any feelings among traders that the worst was behind us could prove premature," said David Jones, chief market strategist at IG Index.

"This combination of news over the last 24 hours has resulted in a predictable knee-jerk sell off - the question from here is whether it is the start of a more sustained slide to correct the impressive gains seen since mid-March," he added.

Falling sterling

New data from the UK led to a sharp reversal in the value of pound and dollar, after sterling had reached a new high against the greenback.

Following the downgrade by Standard & Poor's, sterling fell 3 cents to a low of $1.5514, from its highest in more than six months of $1.5817.

The pound also weakened against the euro, which was worth 88.69p.

Earlier sterling had risen after minutes from the Federal Reserve revealed the bank considered adding to money supplies, easing concerns over dollar funding.

"The Fed said exactly what the market wanted to hear so it could sell the dollar, although it's too early to say whether its a decisive trend that will hurt the dollar," one portfolio manager at a Japanese firm said.

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