The FTSE ignored Wall Street’s higher finish overnight and tumbled lower in early trade at the start of the bank holiday shortened week. Whilst Wall Street and Asia rallied on the trade war hope roller coaster, European stocks were broadly lower amid growing recession fears.
German GDP remains at -0.1%
German GDP data came in as expected, contracting on weaker exports in the second quarter. Germany, the once powerhouse of Europe is now looking more like the Achilles heel as the exporter nation remains caught up in the ongoing US – Sino trade dispute and slowing foreign demand. Whilst the second quarter reading was unrevised, the outlook for the Germany economy remains gloomy. Delving deeper into the figures, we see that the contraction is driven almost exclusively by weak exports. Whilst today the US – Sino trade dispute has calmed, who knows what tomorrow holds.
There is no sign that the US and China will reach a trade deal anytime soon meaning global trade could slow further before it picks up. Recent sentiment indicators also point to a challenging road ahead, with another contraction in the third quarter looking increasingly likey. Two consecutive quarters of contraction are a technical recession. The DAX is trading down around 0.2% in early trade.
Pound gains on Brexit optimism
The FTSE is faring worse than its European peers thanks in part to Brexit developments and a stronger pound. Sterling is advancing across the board as the UK opposition leaders meet today to plot to prevent a no deal Brexit. Whilst Bojo is sticking to his do or die Brexit mantra, he has also expressed a little more optimism that a new deal can still be achieved between the EU and the UK. This comes following last week’s visits to Germany and France where Angela Merkel and French President Macron both said they are willing to listen to alternatives the Irish backstop.
Pound traders are interpreting recent developments as a slight easing back from the brink of a no deal Brexit, and so it is advancing.
US Consumer confidence up next
Looking ahead US consumer confidence will be in focus as investors attempt to see whether the US – Sino trade war is spilling over into the consumer sector. Up to now a solid labour market has kept the consumer sector buoyant, even as the manufacturing sector struggles to keep its head above water amid the trade dispute.
Consumer confidence is expected to slip in August to 129.5 from 135.7. A larger than forecast decline could send the dollar lower raising expectations of a Fed cut in September.
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