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Financial Focus: 26th January 2011

Shock UK GDP figures send FTSE tumbling
Bank of England defends UK economic policy
Triple A rated EU bond has spectacular debut
Euro surges as sterling suffers
Tin in short supply for second year in a row

NEWS:
Investors and analysts were shocked yesterday, as preliminary figures showed an unexpected contraction in the UK economy. GDP contracted by 0.5% in Q4 and, while the latest figures may be revised, they are still a shock given that analysts had been expecting growth of about 0.2% to 0.6%.

Some economists claim that the coalition governments’ austerity plan is too aggressive, and may send the UK into a double-dip recession. Others put contraction down to the unusually cold weather, which interrupted the normal business processes significantly during the quarter.

Mervyn King, governor of the Bank of England said the British economy was “well placed for a return to sustained, balanced growth” and that while the GDP figures proved that the recovery would be choppy, “the right course has been set and it is important to maintain it.”

The European Financial Stability Facility (EFSF) received €40bn in order bids for the €5bn of bonds it wanted to sell, enabling them to price the bonds at much lower yields than a previous EU deal earlier this month. One banker said: “Demand has been spectacular. I do not recall an order book of this size. It filled up in the space of just 15 minutes”.

MARKETS:
Asian stocks mostly climbed overnight, helping the MSCI Pacific Index to a third day of gains, as companies reported higher profits and commodities rose. Markets in Australia and India were closed for holidays.

The shock contraction in UK fourth-quarter GDP rattled markets, but Wall Street remained firm in the expectation of further economic stimulus from the Fed. While the UK’s figures sounded a warning bell for investors, the boost from US government stimulus reassured their belief in continuing global economic resurgence, and eased the exodus from growth assets.

The FTSE 100 is seen gaining on Wednesday, following a speech in which President Barack Obama stressed the need to lower corporate tax rates, and after Wall Street erased losses on general optimism about earnings. The UK blue chip index looks set to add 27 to 29 points, or 0.5 percent, according to financial bookmakers.

CURRENCIES:
Sterling performed badly yesterday, recording its worst performance against the dollar for a month, and hitting a 10-week low against the euro, after Q4 GDP figures from the UK made traders fearful of a double-dip recession. The euro had a much better day, as news of the demand for Euro bonds came through, prompting the common currency to surge to a two-month high against the dollar.

ENERGY:
Oil rose on Wednesday in a technical rebound ahead of a statement from the US Fed expected to reaffirm an improved economic outlook for the world’s largest oil consumer while investors await weekly stocks data.

COMMODITIES:
The price of gold fell to a three-month low yesterday, as improving prospects for the US and European economies refocused investors’ eyes away from the safe-haven precious metal. Spot gold dropped to an intraday low of $1,322.70 an ounce, the lowest since October and a 7.5% fall from its record high in December.

The price of tin, the metal used in soldering and packaging, jumped to a record high as figures from the International Tin Research Institute shows that demand will outstrip supply by about 20,000 tonnes in 2011, following a shortfall of 22,000 tonnes last year that drove a 59% rally in prices.

DATA AT 0700 GMT (FT.COM)
FTSE 100: 5,918 -0.44%
S&P 500: 1,291 +0.03%
Eurofirst 300: 1,144 -0.61%
Nikkei 225: 10,402 -0.60%
Shanghai Comp: 2,698 +0.78%
Dow: 11,977 -0.03%

$ per €: 1.3688 +0.02%
$ per £: 1.5822 +0.06%
¥ per $: 82.04 -0.19%
¥ per €: 112.30 -0.17%
€ per £: 1.1556 +0.03%

WTI Crude: $86.48 +0.34%
Brent Crude: $95.74 +0.51%
Gold: $1,332 0.00%
Copper: $4.22 0.00%
Corn: $6.45 +0.16%

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