John Dance

Markets suggest UK is slipping back into recession

Having began the day with an upward trajectory and reaching a peak of around 5630 in early trade,
the FTSE 100 dropped lower for the rest of the day to close almost a percent above its lows at
5546.9. From a technical perspective, this peak found resistance at the index’s 200 day moving
average, a barrier which has recently proved difficult to breach.

The FTSE’s 0.4% loss followed concerns that this week’s “big bazooka” is proving elusive, given
comments that Germany is refusing to combine the current (European Financial Stability Facility)
and future (European Stability Mechanism) bailout funds. It had been suggested on Monday by
Merkel and Sarkozy that the pair would campaign for the ESM, a €500 billion mechanism, to be
brought forward to 2012 from 2013. This would provide €940 billion worth of firepower if the two
funds were run alongside each other. This was however rejected today by a German official who
stated that any changes to the agreed sequence (the ESM replacing the EFSF) would be opposed.
The German government also suggested that political division may disrupt agreement on a crisis
solution when the 27 members of the EU convene at the end of the week.

The resulting (mild) sell-off in equities saw money flow into the perceived safe haven of US, German
and UK Government bonds whilst those of Italy and Spain lost ground. It must be noted however
that these changes were not dramatic and that the bond yields of the latter countries remain well
below their recent highs.

Adding to woes for the UK specifically was domestic data that suggested UK factories decreased
their output in October, as manufacturing output fell 0.7% month on month. The drop was
replicated for industrial production as a whole, a measure which also includes mining and oil &
gas extraction and account for around 15% of the economy. The figures, which were well below
expectations, increased the likelihood that the UK is slipping back into recession.

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