Markets hit another high as Jackson Hole taper risks moderate slightly
At any point this week you could have heard opposing views on everything from inflation, the future for the gold price and what the USD will do next. This is essentially what a market is – the balance of opposing views- but right now a lack of a clear direction for risky assets is supressing volatility, which is not that unexpected for this time of year. Liquidity is thin in most markets; some stock indices are making fresh and consecutive record highs and markets are taking a breather before the all-important Jackson Hole central bankers symposium.
UK Q2 GDP: is it good or bad?
However, there are still lots of opportunities out there and economic data is coming thick and fast that will determine central bank policy and the overall direction of asset prices for the rest of this year. Looking at the UK first, GDP data for Q2 expanded at 4.8%, which was in line with expectations, however the bad news is that the UK is lagging in the Covid recovery stakes, with the UK economy still 4.4% lower between April and June than it was in the final quarter of 2019. That compares with the US who managed to claw back all lost output in Q2, even the Eurozone is only 3% down relative to the end of 2019. The question for investors is, will this weigh on the pound and UK asset prices? The outlook for economic growth in July is fairly muted due to the surge in the Delta variant, however that is the same the world over so we doubt that UK asset prices will struggle relative to other markets around the world. Future variants will be a concern for the outlook of the UK economy because growth in Q2 was underpinned by the consumer. Consumer spending on restaurants and hotels and transport surged 7.3% in the quarter. Luckily the latest Covid wave of the Delta variant seems to have crested in the UK earlier than elsewhere, which should protect economic growth in Q3 and UK asset prices. While government investment slipped on the quarter, private capital investment rose by more than 2%, which is supportive for future economic growth. Spending on advertising has also surged in recent months as the UK economy has recovered. Expectations are now for the UK economy to get back to its February 2020 size by October this year.
To answer the question about whether the UK’s sluggish economic performance will impact asset prices going forward we need to look at a few things: firstly, October is not that far away, and we could even leapfrog the Eurozone in terms of thew timing of full economic recovery from the pandemic. Secondly, the long-term performance of asset prices will depend on the long-term scarring of the economy – will the pandemic have destroyed some sectors completely? Now that the UK economy is fully back open, and we seem to be past the Delta peak, we think that this looks unlikely. However, if we see more new variants, and, God forbid, any that are vaccine resistant, then the outlook for stocks could darken considerably. Right now, we think that the fate of the FTSE 100 looks pretty solid in the near to medium term, with plenty of companies reporting strong earnings and large dividends and share buy backs. Those of you concerned about Rio Tinto’s share price drop on Thursday, don’t be. It was caused by the stock going ex-dividend, and not due to any fundamental shift in the company’s outlook, thus we expect further upside to come in the coming days.
GBP/USD: riding the wave of Fed taper expectations
GBP/USD is at its lowest level since 27/7 after the GDP report on Thursday and is currently clinging to the $1.38 handle. This pair has been driven mostly by dollar expectations – when prospects of a Fed taper are high then GBP/USD dives, when they recede then the pound tries to make up lost ground. There is a desire in the market to be long pounds, but just not against the dollar right now, as the uncertainty leading up to the Jackson Hole summit is too high. Instead, we prefer EUR/GBP, which has fallen sharply this year from more than £0.90 to the £0.8450-ish level that it was earlier this week. This pair has managed to claw back some losses on Thursday on the back of the mixed messages contained in the UK GDP report, however, we think that this is a red herring. Whatever happens at the Jackson Hole summit, the ECB is way behind in the race to start tapering asset purchases and to tighten monetary policy. Thus, we think that sellers could come back in around the £0.8510 level, and we expect this pair to close below £0.85 on the week, opening the way back to a decline towards £0.8450.
Why Apple remains Delta-variant friendly
Elsewhere, Apple reached a fresh record high, as the new Delta variant that is spreading across the UK continues to boost demand for the tech giants. Apple jumped more than 2% on rumours and expectations that the Fall Apple event in September will include the unveiling of the long-awaited iPhone 13, the Apple Watch series 7 and third generation Air Pods (which hopefully charge properly this time!). As the market continues to fret about the impact of the Delta variant, as we wait for the outcome of this month’s Jackson Hole conference and as the market digests the news that US inflation in July was not worse than expected, and that Treasury yields actually fell slightly in response to a 5.4% reading for US consumer prices, then we expect stock indices to continue their gentle move higher, for the dollar to remain range bound with a slight bid tone and for speculation about what the Fed will do next to reach fever-pitch!