UK GDP & FTSE Racing to the Bottom?

<p>Out of eight major equity indices (Dax-30, Eurostoxx-50, Nasdaq Composite, Dow-30, S&P500, Nikkei-225 and Hang Seng) , the FTSE-100 remains the worst performer so far […]</p>

Out of eight major equity indices (Dax-30, Eurostoxx-50, Nasdaq Composite, Dow-30, S&P500, Nikkei-225 and Hang Seng) , the FTSE-100 remains the worst performer so far this year, +4.2%, compared to as high as 22% and 18% for the Dax and the HangSeng respectively. Aside from Japan’s Nikkei-225, the FTSE-100 is the only index in the group yet having to hit a new high for the year.

Today’s Q3 GDP data not only showed the UK has moved out of recession, but also ascended on the fastest growth in five years at 1.0% q/q following three negative quarters on q/q basis.

The role of special factors contributing to the figures stems from the unwinding of one-off factors, such as the Jubilee bank holiday and Olympics, which weighed on the calculation of Q2 data. Yet the 1.0% rise was sharply above the 0.6% consensus of expectations.

The array of improving macroeconomic figures is illustrated in persistent declines in unemployment to 14-month lows, and employment regaining the pre-crisis peak of 29.6million. Robust growth in retail sales has not prevented inflation from dipping to three-year lows of 2.2% from this year’s peak of 3.6%.

Recessionary conditions still remain in the manufacturing and construction sectors as their respective PMI surveys remain below the 50.0 level, albeit showing an improvement.

But if the UK economy and the UK equity index illustrated a case of “racing to the bottom”, then could we conclude that upside for the FTSE-100 is the greatest considering its current price limitations?

Central banks continue to resort to novel ways of monetizing their nations’ debt – ECB vowing to purchase unlimited amounts of eurozone bonds in the event nations requesting assistance, & the Fed buys bonds indefinitely (until unemployment becomes more subjectively acceptable). For the Bank of England, Sir Mervyn King has cleared the way for the Chancellor to drop his cast-iron fiscal rules and miss his target to reduce the national debt under control by 2016. The BoE has pumped £325bn in asset purchases and is already in its four-month programme to add an additional £50bn. Recent BoE minutes suggest the door is open for a further £50bn in November, which would take total asset purchases to £425bn.

With central banks willing to shock and awe, the quickest path of transmission mechanism continues finding its way in equities. Such accommodation is likely to lend the FTSE-100 its much-needed lift towards 6,050 in the second half of the current quarter. While the index remain well supported above its medium trend measures (55 and 100-week moving averages), it also displays a positive turn in momentum as seen in the monthly chart. A break above 17-month trendline could clear the way for 6200.

 

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