European Indices See Violent Trading Days

Posted on | August 27, 2010 |

European Indices endured a violent days trading after better than expected UK and US GDP revisions were counterbalance by a weak Michigan business sentiment number and comments from Ben Bernanke that admitted the US economic recovery has slowed more than expected.

The FTSE 100 spread betting market had rallied to its daily high of 5193 on the back of the US GDP figure, only to fall back sharply within a matter of minutes to the day’s lows on the back of the weak Michigan data and Bernanke’s comments. This sharp and overly excessive fall encouraged bargain hunting which lifted the FTSE 100 back towards its daily highs to cap a turbulent and peculiar trading session.

Bernanke confirms investors fears

The comments from Ben Bernanke is an admission of what the market had been fearing for some time, that the economy may not be ready to walk on its own two feet and could require further significant stimulus. Bernanke said that the recovery of output and employment in the US has slowed in recent months to a pace weaker than most FOMC participants projected earlier this year, and this will inevitably raise concerns that next week’s nonfarm payrolls could be fairly bad.

UK and US GDP revised better than forecast

The Bernanke admission comes in the midst of a better than expected GDP second quarter revision for both the UK and US. Both revisions were welcomed by the market but I would not go as far as to suggest that they have dramatically changed sentiment, for now at least.

The UK was revised higher to 1.2%, from 1.1%, by the Office of National Statistics. There had been some hope of a higher reading after construction activity grew better than expected, and indeed much of the higher reading can be traced back to construction output.

However, today’s higher reading of GDP is nothing to shout home about. It is an upward revision of 0.1% on top of the first reading and this is not enough to give the market any significant boost in confidence that the recovery will be strong, particularly with major public spending cuts to come. Is a 0.1% upward revision enough to dramatically change market opinion? Perhaps not.

It was the better than expected revision in US GDP however that gave the market a boost in afternoon trading. US Q2 GDP was revised down to 1.6%, when a more drastic fall to 1.4% was expected. In truth however, the downward revision in US GDP from 2.4% to 1.4% is huge and is a cause for concern for those investors who fear the potential for a double dip recession. Let’s not forget that US GDP grew by 3.7% in the first quarter of the year so the slowdown has been quite excessive. Much of this fall has been dictated by a fall in exports which poses a clear warning sign that US growth is being hampered by struggling economies outside of its borders.

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Spread Betting and CFD comments by Sandy Jadeja, Chief Technical Analyst, CityIndex.

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