Week Ahead: the global economic health check, UK passes, but only just

The same themes are repeating themselves at the start of this new week; US stocks have backed away from record highs as continuing trade fears and Hong Kong protests have knocked global sentiment. The mid-month economic data scheduled for release this month is a well-timed economic health check that could help to determine the near-term direction of equities. 

UK economy avoids recession, only just… 

First up was UK Q3 GDP, which grew by 0.3% in the third quarter. The services sector was the biggest driver to growth, along with a strong performance in the construction sector which grew by a surprisingly strong 0.6%. Growth was also boosted by stronger spending in both the private and public sectors, which expanded by a decent 0.3%. However, the Office for National Statistics tempered enthusiasm by saying that rolling three-month rates, which compares Q3 with previous quarters, returned to rates seen before the notable strength in the first three months of the year. So, the UK economy has avoided a recession, but only just, and the UK’s growth outlook remains mired in uncertainty especially since monthly GDP fell by 0.1% in September. 

Farage gives the pound a boost 

The pound was generally fairly unresponsive to the economic data, however, GBP/USD managed to regain the $1.28 handle mid-morning. There is a good argument that economic data is playing second fiddle to the political outlook right now. The pound really found its stride after the leader of the Brexit party, Nigel Farage, heeded pleas from the Conservatives and agreed not to field any Brexit Party candidates in seats won by the Conservatives in the 2017 general election. Instead, the Brexit Party is planning to stand in all other seats in an effort to win seats from the Labour Party. The market considered this a win for the Conservative party, and since the Tories are considered the most market friendly party in the UK right now, the pound duly rose on the news. It managed to climb to a high just above $1.2890, however, it has since slipped back this afternoon, and GBP/USD is currently treading water around $1.2860. 

Polls matter for sterling 

Perhaps the latest news from YouGov, the UK polling company said that the Brexit Party standing aside would not make much difference to the political outcome. The latest polls suggest that next month’s election is a two-horse race between the Conservatives and Labour. The Conservatives have managed to extend their lead in the polls to 39%, according to YouGov, with Labour slipping back slightly to 25%. YouGov have stated that current polling data suggests a 4% swing in support for the Tories, which would give them a sizeable majority. Thus, at this stage of the race, it would take a major shift in fortunes for Labour to make a late surge in the polls, however, it did manage to do this in 2017. There may also be a pro-Tory effect from Nigel Farage’s comments about the Brexit Party not standing in Tory seats at this election, since it may make some people who were planning on voting for the Brexit Party happier to vote Tory. We shall have to see how this pans out, however, if the next major polls later this week see a surge in support for the Tories, we believe that this will be pound positive in the short term, and we may see a return to the $1.30 highs from mid-October. 

Why bad news is good news for global stocks 

Elsewhere, global stocks have retreated at the start of this week, however, we remain generally upbeat about the outlook for global equities for the rest of this year. Our optimism is based on two things: fiscal and monetary largesse. The Federal Reserve in the US has cut interest rates and is likely to remain sensitive to the economic outlook for the US, the ECB has cut rates and re-started QE, the Bank of England remains on high alert for an economic downturn, and whoever wins the UK’s general election is likely to go on a spending boom in the next few years. While that may not be so good for the UK’s credit rating, we believe that it will boost our sluggsh growth rate and boost stocks, especially in the broader and more UK-focussed FTSE 250 index. 

We believe that a shift in the mindset of the market is taking place right now, with savvy investors willing to take a risk and move out of value stocks and towards growth stocks, this is also having a positive impact on the financial sector in the US, which has started outperforming the broader US index. The latest round up of S&P 500 corporate results suggest that the US is experiencing its third straight quarter of quarterly earnings declines since 2016. The overall decline in earnings in the third quarter is estimated at -2.7%, which is slightly better than the -4% expected by analysts, according to FactSet. So far, five of the 11 sectors in the S&P 500 have reported a decrease in earnings including the energy and consumer discretionary sectors, which have both seen double digit declines in earnings for the third quarter. Analysts also believe that earnings will remain in negative territory for Q4, before picking up next year. 

This picture may look pretty grim; however, the fiscal and monetary largesse take some time to hit the corporate bottom line, however, the taps have been turned on and that is all that equity investors are worried about at this stage. Combined with positivity around a US/ China trade deal and a smooth Brexit, there is a recipe for an early Santa rally in global stocks, and this is the main reason why we are optimistic that US stocks can continue to climb into record territory for the next few weeks, and why any sell off could be used as a buying opportunity. 

US consumer check 

Later this week it is also worth watching US retail sales released on Friday. The consumer has been the one bright spot for the US economy this year, if consumption looks like it is collapsing then this could boost expectations for more dovish activity from the Fed next year, which should help global stocks at the end of the week.