Euro fears to take edge off FTSE rally this week

SURGING commodity prices spurred UK shares on to another weekly gain on Friday, and a seven-week high for the blue-chip FTSE 100 index. Yet we expect the market to take a hit on th open this morning, with focus shifting back towards Europe.

In out-of-hours trading, GFT is forecasting the UK index to open down 20 points from last week’s close, at around 6,035. The German DAX is quoted to open down 28 points at 7,189 and the French CAC is called down 15 points at 4,046.

Portugal finally succumbed to the inevitable bail-out request on Thursday, although the incumbent caretaker Socialist government is refusing to discuss the details of the terms of the rescue funds with opposition parties, increasing the likelihood of renegotiation with the EU following elections in June.

The diverging issues facing the Eurozone were highlighted by the ECB’s decision to raise interest rates to counter rising inflation in several European countries, pitted against the backdrop of the third EU member to seek aid and ultimately brace itself for severe austerity measures.

The ECB has taken a much harder line than the UK against inflation, which is running at “just” 2.6 per cent in the Eurozone. Tomorrow sees the release of consumer price index data for the UK, and we expect a 30-month high of 4.6 per cent. This is largely as a result of continued rises in oil and commodity prices, and will weigh on shares ahead of the release.

The Bank of England’s stubborn refusal to raise interest rates is nevertheless proving a boost to the FTSE, where mining and commodity stocks are underlying the current rally as gold and silver continue to break records thanks largely to precisely those inflation concerns.