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Financial Focus: 19th January 2011

BoE under pressure to raise interest rates to curb inflation;
Portugal suffers from German minister’s comments;
Lack of European agreement may prevent euro advancing;
IT companies encourage investors.

Investors are speculating that the Bank of England will start raising interest rates after the Spring as soaring fuel and food prices pushed inflation higher than expected in December.

The UK Consumer Price Index rose 3.7% in the year to December, with inflation up from 3.3% in November. The increasing inflation rate led some analysts to predict that inflation will reach 5%, which is considerably higher than the targeted 2%.

Wolfgang Schauble, Germany’s finance minister, faced criticism yesterday as he appeared to put the brakes on the changes that many of the ministers feel are necessary to deal with the ongoing Eurozone sovereign debt issues.

The market had been trading positively as it expected a good outcome from the meeting of EU finance ministers in Brussels, but the lack of agreement disappointed investors and is likely to have prompted Portugal’s bond yields to go above 7%.

Apple and IBM produced better than expected results yesterday, giving impetus to the US market and likely to give a lift to investors in London as UK trading starts this morning. IT companies are considered good barometers of the economy as a whole, and the FTSE is being called up around 20 points today, which would mean it finding a level of 6,078.

The euro advanced against the dollar despite continuing disagreements between European finance ministers meeting to discuss the content and timescale of a more cohesive method of dealing with Eurozone sovereign debt. Traders feel that the lack of a clear signal or direction could cause the common currency to languish between $1.30 and $1.35 for the near future.

Sterling was higher against the dollar, as risk appetite grew and speculation that the Bank of England may raise interest rates to control inflation.

Oil futures were mixed after the International Energy Agency warned that high crude prices are putting global economy at risk. New York’s main contract, light sweet crude for February delivery, gained five cents to reach $91.43, but Brent North Sea crude for March fell back 21 cents to record $97.59.

Spot gold went up $5.30 from its New York close on Tuesday, gaining against a backdrop of a surging euro and weakening dollar. Metals traders are watching for signs that copper will push on from its current level of $9,720 per ton (up $20) and through the psychologically important $10,000 barrier. Once through this level, analysts believe that the bulls will increase buying interest and take the metal to around $10,450.

FTSE 100: 6,055 -0.02%
S&P 500: 1,295 +0.14%
Eurofirst 300: 1,167 -0.04%
Nikkei 225: 10,557 +0.36%
Shanghai Comp: 2,758 +1.81%
Dow: 11,787 +0.47%

$ per €: 1.3462 +0.56%
$ per £: 1.6025 +0.41%
¥ per $: 82.08 -0.62%
¥ per €: 110.51 -0.05%
€ per £: 1.1899 -0.18%

WTI Crude: $91.70 +0.35%
Brent Crude: $97.98 +0.18%
Gold: $1,368 0.00%
Copper: $4.42 0.00%
Corn: $6.64 +0.72%

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