Morning markets: Another grim week looms

6th September 2011

Yesterday the FTSE closed down 189.45 points at 5102.58, a decline of 3.5% but Germany and France fared worse losing 5 per cent.

City AM pronounces the UK increasingly weak . It reports that the "Markit/Cips services purchasing managers' index (PMI) was expected to come in at around 54.0. It instead dropped off a small cliff, declining from 55.4 in July to 51.1 in August. This is the biggest single month drop since foot-and-mouth disease ravaged the country in 2001."

The morning paper quotes Jonathan Loynes, chief European economist at Capital Economics saying: "A composite measure of the main activity indices of the reports on manufacturing, construction and services is now consistent on the basis of the past relationship with quarterly contractions in GDP of about 0.2 per cent."

Adding to gloom, Fitch is suggesting that the UK's house prices could have some 25 per cent further to fall as  Citywire reports . It has launched a new index of house prices, though the ratings agency is asking for comments from housing market experts as it attempts to refines its methods. But it does suggest prices could fall in much of the UK for the next two years.

The Ernst & Young Item Club launching its first financial services report was also pessimistic though it was particularly interested in ring-fencing and next week's Independent Banking Commission report.

The club is warning that a ring fence could increase the cost of lending for large corporates by 1.5 per cent and could lead to a loss of GDP to the UK of 0.3 per cent.

Neil Blake, economic advisor to the Ernst & Young ITEM Club said: "The market reaction to the ICB report is going to be instrumental in determining the knock-on effect to the wider UK economy- the greater the restrictions on cross-funding between the retail and investment arms of banks, the more severe we expect the reactions of the financial markets to be and the greater the effect on large corporates and, as a result, UK GDP," he added.

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