Bernanke Curve, UK Stocks Decline

123jump.com Staff
14 Feb, 2008
New York City

UK stocks changed course and declined after the comments from the Fed Chairman Bernanke. The cautionary comments put investors on the defensive. He also reiterated that the downside risk to the economy has increased and banking sector may remain under pressure. He sounded optimistic note on the inflation but also suggested that the economic growth in the near term is likely to be sluggish. UK stocks declined, led by a fall in housing and banking stocks on the comments.

[R]12:00PM New York, 6:00PM London- Bernanke comments reverses gains in London

Stocks in London reversed earlier gains to close down after comments by U.S. Federal Reserve Chairman Ben Bernanke to the U.S. Senate that banks were still vulnerable to subprime related losses sparked a sell-off in financial and home builders’ stocks. Bernanke highlighted risks to the economic downturn and said that economic growth is likely to remain sluggish in the near term.

Market Sentiment

In London trading FTSE 100 stocks fell fractionally by 0.01% or 0.8 to 5,879.30.

Of the FTSE 100 stocks 44 gained, 54 declined and 4 were unchanged. Diageo Plc led advancers after reporting that first half profit increased 8.9% to £975 million.

Bernanke Sees More Downside Risk with the Economy

The U.S. stocks declined sharply after the Fed Chairman Bernanke highlighted the risks to the economic downturn linked to the ongoing correction in the housing market and dramatic decline in the health of the U.S. banks.

The Federal Reserve Chairman Ben Bernanke sounded a cautionary note in his testimony to the Senate. Bernanke highlighted the recent strains in the banking sector and turmoil in the mortgage securities markets also noted the recent weakness in dollar, rising food and energy price inflation, and ongoing correction in the housing market.

He noted, “In part as the result of the developments in financial markets, the outlook for the economy has worsened in recent months, and the downside risks to growth have increased. To date, the largest economic effects of the financial turmoil appear to have been on the housing market.

The virtual shutdown of the subprime mortgage market and a widening of spreads on jumbo mortgage loans have further reduced the demand for housing, while foreclosures are adding to the already-elevated inventory of unsold homes. Further cuts in homebuilding and in related activities are likely.”

He also alluded to the lack of flexibility the Fed enjoys in tacking the issue in the short term and noted that, “Monetary policy works with a lag. Therefore, our policy stance must be determined in light of the medium-term forecast for real activity and inflation, as well as the risks to that forecast.”

He estimated that the short term economic growth will be impacted by the current malaise in the securitization markets and a weakness in the construction industry.

He said in his testimony, “At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt.”

The Chairman sounded optimistic tone on the inflation and hoped that inflation will remain under check. He estimated that, “At the same time, overall consumer price inflation should moderate from its recent rates, and the public''s longer-term inflation expectations should remain reasonably well anchored.”

Financial Services Rose in 2007

Bloomberg news reported today that according to recruitment company Morgan McKinley bonuses for London’s financial service workers increased for 80% of the institutions.

The survey reportedly involved 220 traders, bankers and support staff.

According to the company new job vacancies fell 20% to 8,127 in January from a year earlier. The study also notes that the number of people seeking to change jobs after the bonus season rose 11% from a year earlier in January.

In addition, the average salary, which excludes the bonus, for London''s 1.3 million financial-services employees, is estimated to have increased 5% from a year earlier to £53,246.

Gainers and Losers

Diageo led advancers in the FTSE 100 stocks with a rise of 4.55% followed by gains in Reckitt Benckise of 2.86%, in Sainsbury Plc of 2.63%, in Vedanta Resources of 2.56%, in BT Group of 2.43%.

Diageo rose after the company reported first half profit rose 8.9% after the liquor maker reported an 8.9 % gain in first-half profit to £975 million on higher sales of Smirnoff vodka and Johnnie Walker whiskey in Asia and North America.

Anglo America climbed 2.28% and Xstrata jumped 1.90% as a result.

HBOS Plc led decliners in the FTSE 100 stocks with a drop of 5.11% followed by losses in Home Retail Group of 3.9%, in British Land Co. of 3.87%, in Schroders Plc of 3.77% and Schroders of 3.31%.

Other financial stocks also declined on Bernanke’s comments and after UBS added $26.2 billion in exposure to the U.S. mortgage backed securities. Alliance & Leicester fell 2.77%, Barclays declined 2.37%, and Royal Bank of Scotland fell 2.23%.

Homebuilders also fell as well. Wolseley shed 2.51% and Hammerson edged down 3.02%.

International Markets

In Tokyo Nikkei 225 Index closed higher 558.15 or 4.27% to 13,626.45, in Hong Kong Hang Seng index increased 852.13 or 3.68% closed to 24,021.68. Australia ASX 200 index increased 142.70 or 2.57% to close 5,684.80.

In South Korea Kospi Index increased 65.67 or 4.02% to close at 1,697.45, in Thailand SET index closed higher 2.70 or 0.33% to 832.11 and Indonesia JSE Index edged increased 64.86 or 2.48% to 2,675.65. Sensex index in India increased 817.50 or 4.82% to 17,766.63.

In London FTSE 100 Index closed lower 5.40 or 0.09% to 5,874.70, in Paris CAC 40 Index increased 3.25 or 0.07% to close at 4,858.65 and in Frankfurt DAX index lower 11.39 or 0.16% to close at 6,962.28. In Zurich trading SMI decreased 34.46 or 0.46% to close at 7,501.99.