Uneasy markets await key Bernanke speech

(Update) The FTSE opened more than 40 points lower on Friday as US Federal Reserve chairman Ben Bernanke gears up to deliver a key speech on the ailing US economy.

London's leading index fell as low as 5,085 in early trading but had recovered slightly by 11am.

A year ago, Bernanke used a speech in Jackson Hole, Wyoming, to pave the way for $600bn (£368bn) of quantitative easing (QE) - the process of injecting cash into the financial system to try to boost the economy.

And with data earlier this month pointing to continuing sluggish growth in the US and Europe, some expect Bernanke to act again and launch a third round of QE.

To date, a total of $2.3trn has been injected in a bid to revitalise the recovery.

Shares have rallied all week in anticipation that the Federal Reserve will act to reinvigorate the US economy, although markets closed sharply lower yesterday on fears Bernanke will rule out new stimulus.

The FTSE 100 closed last night down 1.4% while the Dow Jones shut 1.5% lower.

"Mr Bernanke is unlikely to fulfil the markets' hopes that he will pave the way for a third round of asset purchases in his speech," Paul Dales, senior US economist at Capital Economics, told the Independent.

"It is easy to make the case for more policy support based on the still high unemployment rate, the weakening economy and the recent turmoil in the financial markets.

"But the difference between now and last year is that the rebound in core inflation to a 19-month high of 1.8% in July means there is no immediate threat of deflation. This is likely to prevent QE3 at least until core inflation starts to fall back early next year."

Bernanke's speech comes as a number of leading economists slashed their forecasts for global growth.

UBS and Citi followed Morgan Stanley in lowering their outlook this year to 3.3% and 3.2% from 3.8% and 3.7% respectively. The world economy had been expected to grow at around 4% just a few weeks ago.