UK markets in lukewarm response to new government

[May 12, 2010]  LONDON (AP) -- Britain's financial markets gave a subdued welcome to the country's first coalition government since World War II, with both the pound and stocks down from earlier highs Wednesday.

The euro, meanwhile, was up slightly as stronger German growth data helped offset lingering doubts about the region's debt crisis.

The FTSE 100 index of leading British shares was the only major European index in retreat, trading 14.71 points, or 0.3 percent, lower at 5,319.37, while the pound was flat on the day at $1.4930, having earlier struck a high of $1.5044 as the uncertainty surrounding the creation of the new government ended.

Neil Mackinnon, global macro strategist at VTB Capital, said the financial markets will await details of how the new Conservative/Liberal Democrat coalition government will tackle the budget deficit, expected to be over 160 billion pounds this year.

"The market risk has to be one of disappointment especially if the Lib Dems in the coalition resist spending cuts or push for the fiscal adjustment to be geared towards tax increases rather than spending cuts," said Mackinnon.

As the new government was taking shape, the Bank of England's governor Mervyn King hinted that the British economy may need some further support over the months ahead for the recovery to become fully entrenched.

Speaking after the publication of the Bank's quarterly economic projections, King warned that the downside risks to economic growth have increased in the wake of government debt crisis gripping Europe in particular -- and that's even before the coalition government has outlined its first raft of spending cuts, expected in an emergency budget statement from the new finance minister George Osborne within 50 days.

"King's words that we are only a part way through the financial crisis are a sobering reminder that the return to health of government balance sheets will be an overriding theme for both U.K. and global markets in the coming years," said Jane Foley, research director at Forex.com.

Elsewhere in Europe, Germany's DAX was up 79.89 points, or 1.3 percent, at 6,117.60 while France's CAC-40 index rose 14.20 points, or 0.4 percent, to 3,707.40.

Modestly better than expected economic growth of 0.2 percent in Germany in the first quarter of the year has helped relieve pressure on the euro -- by late morning London time, the euro was trading 0.4 percent higher at $1.2687.

However, the euro's medium-term fortunes are likely to be directly correlated to the debt crisis that has already seen Greece bailed out by its partners in the eurozone and the International Monetary Fund, and forced European policymakers to unveil a euro750 billion financial support package for the single currency zone.

Figures from Eurostat, the EU's statistics office, did little to encourage hope that the eurozone economic recovery is gathering a head of steam -- the 0.2 percent quarterly increase across the 16-country bloc hid big disparities. Greece contracted another 0.8 percent even before the government has enacted the bulk of its austerity measures.

Policymakers across the eurozone face a difficult balancing act over the coming months -- sustaining growth at a time when big budgetary cutbacks are being enacted.

"The main concern for the euro countries will be restoring confidence in their fiscal positions, while keeping the impact on economic growth to a minimum," said Jorg Radeke, an economist at the Center for Economic and Business Research.

Wall Street was poised to open modestly higher later -- Dow futures were up 24 points, or 0.2 percent, at 10,733 while the broader Standard & Poor's 500 futures rose 3.3 points, or 0.3 percent, to 1,155.50.

Earlier in Asia, stock markets were mixed.

While Japan's benchmark Nikkei 225 stock average shed 17.07 points, or 0.2 percent, to 10,394.03, Hong Kong's Hang Seng index gained 0.3 percent to 20,212.49 and stocks in mainland China rose 0.3 percent.

Benchmark crude for June delivery was down 12 cents to $76.25 a barrel in electronic trading on the New York Mercantile Exchange. The June contract fell 43 cents to settle at $76.37 on Tuesday.

[Associated Press; By PAN PYLAS]

Associated Press writer Alex Kennedy in Singapore contributed to this report.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.