Experts Cast Doubt Over Darling's Budget Forecasts

After a disastrous start to the week, financial markets rallied well on Friday to close the week unchanged or slightly up. The CAC, DAX and FTSE closed the week up 0.4%, 0.73% and 1.65% respectively. The S&P 500 and Down closed the week down 0.23% and 0.65%, with the strongest performance coming from the Nasdaq 100 which rose 3.24%, its 7th winning week on the trot. The Nasdaq was buoyed by strong performances from Ebay, and Microsoft. Amazon also continued its incredible run in the face of the bear market, since the November lows it has risen 141.11%.

In keeping with the theme of the last few months, most of the movements last week were led by sentiment concerning the banking sector. The week started badly on fears that US banks might fail the stress test, and ended positively when it emerged that it was likely that all had passed. However, the release of the stress tests seemed to bring more questions than answers with many believing that the test wasn’t particularly stressful. Some analysts point out that the ‘adverse’ conditions tested do not go anywhere near far enough. The suspicion is that the US treasury didn’t want any further shocks to rock the financial sector, a decision that may come back to haunt them.

As expected, the budget was the focus of analysis in the UK last week. The FTSE was largely unaffected by the budget with most companies gathering their earnings from across the globe, not just the UK. Currency markets were the most volatile as traders reacted to the announcement that UK borrowing will hit a peacetime record of £175bn, or 12% of GDP. Darling surprised many by adjusting his forecast for UK growth for 2009 downwards to -3.5%. This puts the treasury’s forecast in line with other institutions such as the IMF, but Darling’s forecasts for 2009 and 2011 are still far more optimistic than any other outside organisation other than the Bank of England.

Considering how inaccurate the government’s forecasts have been so far, it is little wonder that currency traders didn’t believe a word of it, and sold the pound aggressively against the euro, dollar and yen. The pound gave back all the gains made against the euro last week as UK GDP figures released on Friday showed that Darling’s projections may already be overly optimistic.

Increasingly a barometer of global economic confidence, June crude oil contracts closed the week above $51, while curiously; natural gas futures continued their down trend closing the week at $3.37, some 75% down from the peak last June. Gold endured a better week, closing up significantly for the first time in five weeks.

The highlights for the coming week include the FOMC statement on Tuesday and ISM manufacturing on Friday. The UK has a number of economic announcements, including the UK Nationwide house price index on Wednesday, and the Halifax House price index also expected at some point in the week. Although questions remain over accounting tricks employed by banks and the depth of the stress test from the US government, there could be room for more upside next week on
US markets.

A one touch trade predicting that the Dow Jones will hit 8204 in the next 7 days, could return 21% at BetOnMarkets.com.