Good morning
Today at 9.30am, UK GDP figures will be published. Following last quarter’s figure of 0.90% the market/economists are predicting a slowdown, with output rising 0.7% for Q3. Currently year on year the number sits on 3.20%, however if the predictions are correct that would move the YoY number down to 3.00%. Should the economists get it right and the number is as predicted, it is likely to further dent the BoE’s rate hike expectations, with the GBP likely to suffer (fall below 1.60) as a result. Needless to say, should the economists get it wrong and the number exceeds 0.80%, we are likely to see the GBP rally as a result. Bottom line, the UK economy continues to outperform the EU (excl US). Long term our projections remain intact for a continued strengthening of the GBP vs the EUR, though ag. the USD it is really at the mercy of the USD.
If you cast your mind back to last week (15th/16th) and our blog where I listed 6 reasons why the world is no longer “a safe place”, point number 3 identified Ebola. Overnight it was reported that the first case of Ebola reared its ugly head in NEW YORK. The S&P 500 and European markets have all opened up lower this morning as a result. Reports claimed that the markets were unnerved by swelling contagion fears considering the metropolis is the financial capital of the world (and London). With next weeks HUGE FED/FOMC meeting (28/29th) looming, I think investors will sit on the sidelines and prefer to wait to see what the outcome of that meeting is. It is a well known fact that Pres. Yellen will announce the end of QE which I believe could be the catalyst to send stock markets worldwide on another round of selling. By confirming an end to QE3, the FED’s announcement will make the wind down in QE a reality. If the statement that accompanies the decision does not soften its tone materially, the discount to the FOMC rate forecasts will start to backtrack – lifting the Dollar and weighing heavily on capital markets. We have seen after previous FED announcements when reductions in QE were announced, markets fell as a result. Next week I think will be no different. Furthermore, Thursday 30th sees the US publish Q3 GDP numbers and I cannot stress the importance of this number. Any slow down will be a big blow not only to the USD but to the markets in general and push any anticipated rate hike further down the curve. Then again as we all know, Central Bank Gov./Pres. do have a knack for surprising the markets.
ECB announces Sunday their findings on commercial Bank’s stress test. If the results show too few failures, the test will be considered a hollow review. If the results show too many possible failures the market will have a new worry to add to EU’s recession and deflation fears (not to mention the 6 reasons I listed on the 16th Oct blog). Having mentioned this previously, the ECB needs to stabilize the situation, and so the ECB’s Asset purchase programme which started this past week will likely continue. Details of the purchases will be released Monday and each Monday thereafter. Next week sees a plethora of EU data including Spain’s Q3 GDP, German employment, and EU CPI.
As for today, it is ALL EYES ON GBP. I expect volatility whichever way it goes. I would like to think the UK is still performing at the same levels seen throughout the year, however one has to be conscience of the fact that the slowdown in the EU and China, not to mention lower oil and commodity prices, could hit the UK GDP brakes. While it may be behind us, I think the Scottish referendum HURT the UK and so I agree with the economists, GDP will disappoint.
Have a great weekend and take care