Weakness and inflation

22 February 2008

MADRID – The European stock markets managed to post gains yesterday despite the decision by both the European Union and the United States to lower their economic growth forecasts.

The Spanish blue-chip Ibex 35 at one point was up by as much as 1.59 percent but after the release of US economic indicators caution overtook the session including volatility. By the end of the day, the benchmark index edged up by only 0.71 percent, which allowed it to remain above 13,000 points. Turnover in the Spanish continuous market dropped to EUR 3.757 billion, a sum that reflected traders’ prevailing caution.

The EU lowered its growth forecast for the euro zone by 0.4 points to 1.8 percent, while raising its forecast for inflation by half a point to 2.6 percent. A few hours later, the US Federal Reserve followed suit by lowering its estimate for US economic growth by half a point from its previous forecast in November of between 1.3 and 2.0 percent. That was followed by a downgrade of 0.75 points in the November estimate.

The Philadelphia Fed’s index of industrial activity in the region dropped to minus 24 points in February from minus 20.9 points the previous month. At the same time, the index of leading US economic indicators dipped by 0.1 percent in January.

Investors remain in a state of confusion about two key factors: the extent and duration of the crisis. Analysts expect significant swings in the market but are unable to agree whether there will be a rebound followed by a fall, or whether prices will look to find a firmer "floor" from which to stage a rally.

For the moment, the rises in commodity prices, to a large extent due to speculative movements in the markets, are making it more difficult to predict how economies will evolve.

Subject: Spanish news