FTSE shrugs off TUI news, as signs grow that US employment is shrinking

This week has seen the markets break a number of records including record highs for the gold price and for the German stock index, the Dax. The stellar November performance for equities and bond prices, which has seen a decline in bond yields across the world and a loosening of financial conditions, has continued into December. At the start of this week, gold prices hit an all-time high of $2,135 per ounce, however, since then there has been sharp selloff, with the price of gold dipping 5% to just under $2030. The selloff in gold, comes at the same time as the price of bitcoin, which has also surged in recent weeks, has also fallen back to a notch below $35,000. Those looking for Bitcoin to break the $100,000 barrier, might have to wait a little longer. While gold and bitcoin have been rising sharply alongside stocks and bonds, the pullback that we have seen is not indicative of a move away from risk after a rally that has lasted more than 5 weeks. Instead, we think that the market will trade with a cautious tone as we lead up to Friday’s US payrolls data.

German Dax diverges from the downbeat economy

The German Dax has been in focus this week after it reached a record high for the second day on Wednesday. The German index is up more than 19% so far this year, led higher by Allianz, autos and banks. There has been an interesting divergence between the German stock market and the German economy. The stock market is surging higher, yet German economic data remains weak and is painting a gloomy picture for the Eurozone’s largest economy. October manufacturing orders fell 3.7% MoM, and the construction sector PMI fell even deeper into negative territory for November, declining to 36.2, down from 38.3 in October. This is not a pretty picture and suggests that Germany is struggling economically, so why is the Dax rallying? Some argue that bad news is good news for European equities, since bad economic news is increasing the chances that global central banks will start to cut interest rates. The ECB is expected to cut rates by the most in the coming months, with more than 70 basis points of cuts priced in by financial markets. The head of Germany’s central bank, Isabel Schnabel, said that further interest rate hikes are unlikely now that inflation is falling. This was taken as a green light that the next move from the ECB will be a rate cut. While we don’t expect a cut at the ECB meeting next Thursday, the press conference with Christine Lagarde will be interesting. Will she give her blessing to the rate cut expectations and will she hint that a rate cut could come in Q1 2024, or will she push back? If she chooses the latter, then we expect European stocks to come under sharp downward pressure, including the Dax.

Why the outlook for German stocks may not be so rosy

Overall, German stocks are trading on the back of momentum, positive risk sentiment and the prospect of interest rate cuts and lower financing costs. Investors are willing to overlook the weak economic data for now, and the fact Moody’s, the credit rating agency, cut its outlook on China’s credit ratings, and switched China to a negative outlook. This could have a knock-on effect on big international companies, who rely on Chinese markets, including many German ones such as the auto makers and industrial firms. However, that is a worry for another day, as the market concentrates on how far the ECB will cut rates and loosen Eurozone financial conditions. The positive news for Germany also spread to Italy, with the FTSE MIB breaching the 30,000 marks for the first time since 2008.

The FTSE 100 soldiers on

The FTSE 100 is brushing off the news that tour operator TUI is thinking about delisting from the FTSE 100. The company has a dual listing in London and Frankfurt and a large amount of its trading is done in Germany, which is the reason the company is giving for why it is considering leaving the LSE. It could also be nudged to do so by the massive outperformance of the Dax versus the FTSE 100 this year. TUI also gave an upbeat revenue outlook for 2024, with revenue growth expected to exceed 10% in 2024, up from EUR 20.7bn in the 12 months to end of September 2023, as the boom in air travel continues.

FX view

Elsewhere, the dollar has attempted a comeback this week, even though stocks are still higher, and the market is ramping up bets that the Fed and other central banks will cut interest rates next year. EUR/USD and GBP/USD are all lower this week, as interest rate differentials weigh on the euro and has a knock-on effect for GBP. USD/JPY has bucked this trend and the yen is continuing its march higher vs. the USD, as the BOJ is the only major central bank expected to hike interest rates next year. Where the dollar goes in the short term, will depend on the payrolls data that is due for release this Friday. A strong report could see a stronger dollar, while a weak report could see the dollar decline further. Whatever the outcome, expect a burst of volatility at 1330 GMT on Friday.  

What to expect from US payrolls

The US payrolls data is key event that could determine the future of the risk rally through to the end of the year. Current expectations are for a reading of 185k, and for the unemployment rate to remain steady at 3.9%. Average hourly earnings are expected to drop a notch to 4% from 4.1%. The ADP private sector payrolls report for November was released on Wednesday and it was weaker than expected at 105k. This index does not have a particularly strong correlation with NFPs, but it could be another sign that the US labour market is slowing down sharply. Key questions to think about from this report include: what happens if NFP growth is strong? What if NFPs are weaker than expected, but wage growth remains strong? If the NFP report is in line with expectations, what sectors of the economy are shedding workers. If this is the service sector, then it might suggest a broader economic slowdown in the US sometime in Q1. There is a lot of information to be gleaned from the November labour market report and this could make the stock market reaction hard to gauge at the end of this week.