UK still in recession but Q2 GDP revised to -0.5% as expected
City Index August 24, 2012 8:40 PM
<p>European markets traded between flat and marginally lower on Friday with selling in heavyweight mining stocks weighing on the FTSE 100, whilst second quarter UK […]</p>
European markets traded between flat and marginally lower on Friday with selling in heavyweight mining stocks weighing on the FTSE 100, whilst second quarter UK GDP was upwardly revised to a contraction of 0.5% from a deeper preliminary reading of -0.7%.
The upward revision to UK GDP for the second quarter was expected and so the reaction in the markets was minimal at best. The pound sterling fell marginally against the US dollar whilst the FTSE 100 was initially unmoved before trading slightly higher.
Given the fact that the preliminary reading of -0.7% was such a surprise, and that nine out of the last ten quarters has seen the final GDP reading been revised from the preliminary reading, today’s revision is no surprise in the slightest.
As such, it is hard for investors to cheer it. The UK remains in recession.
Today’s revision in Q2 UK GDP is unlikely to dramatically change the likelihood that the Bank of England will increase asset purchases before the year is out.
This morning’s losses mean that the FTSE 100 continues to hit lower daily lows and lower daily highs, and we are on track for the first weekly decline in the FTSE 100 since the last week of July.
With global indices and the VIX – a key gauge of market fear or pessimism – hitting important technical levels this week, the early reactions have indicated that a correction could be on the cards for equities, particularly if the sentiment around the Jackson Hole economic symposium does not give investors enough optimism that central bankers are preparing to act with aggressive stimulus.
See below chart of the S&P 500 vs the VIX.
The FOMC minutes hinted towards this potential but still the equity market reaction was not forthcoming, showing that investors are waiting to see action not rhetoric.
It’s been almost a month since Draghi issued the fated words ‘we will do whatever it takes’ and yet the markets is still waiting for action form the ECB. Patience is running thin but faint hopes that Draghi can come through with buying of Spanish and Italian bonds alongside media speculation of further ECB action is helping to keep investors interested.
The miners have proved to be a key drag on the FTSE this morning, as investors react to a front page editorial in the China Daily which highlighted the significant downward pressures facing the country. The editorial went on to state that the country should be prepared in the short term for more shocks and maintain long term structural adjustments. The paper is closely aligned with the tone of the government and so investors can use this as further evidence that the country could be planning further stimulus measures to increase activity in the second half of the year.
Normally further evidence of potential stimulus in China has seen a bullish reaction in mining stocks, yet today it would appear investors are happy to downgrade their risk exposures, matching a similar theme in broader markets.
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