FTSE 100 set to climb on US stimulus hopes, while UK GDP slumps
The FTSE 100 continued its ascent on Wednesday, despite the UK economy sliding into a recession after shrinking 20.4% in the second quarter.
The FTSE 100 closed 2% higher on Wednesday to 6280.12 points, despite the UK economy sliding into a recession after GDP shrank by 20.4% between April – June (Q2) 2020.
The blue-chip index moved higher midweek, with investors choosing to overlook the disappointing economic data coming out of the UK.
Instead, traders appear to remain hopeful of a potential vaccine being developed, with the race heating up among drug makers like AstraZeneca, GlaxoSmithKline, Pfizer and Moderna, as well as other smaller biotech firms.
Investors are also hopeful of US politicians implementing another stimulus package, with US stocks rallying near all-time highs on hopes that Republicans and Democrats will get the bill passed despite weeks in stalemate.
UK enters recession after dismal Q2 figures
The UK economy contracted by a fifth in Q2, compared with the same period a year prior, with the economic fallout of Covid-19 made clear after months of lockdowns that forced many industries come to a complete standstill.
The dip in economic activity in Q2 is the worse on record and follows a 2.2% contraction in the previous quarter. As a result of two consecutive quarters of economic contraction the UK economy has officially entered into a recession.
‘The UK is officially in recession, and the slump in the first six months of the year is worse than most of its peers. However, the monthly data already shows that the worst is behind us for the economy. GDP numbers for June show a strong bounce in activity as the economy emerged from lockdown.
‘We expect pent-up consumer demand to drive a strong recovery in the third quarter, although this momentum will gradually fade as the outlook for the labour market deteriorates,’ Dean Turner, economist at UBS Global Wealth Management said.
‘The UK economy is unlikely to return to its pre-crisis level before the end of next year,’ he added.
Industries that require a high degree of social interaction have been acutely impacted by the various coronavirus restrictions that have been put in place by the UK government.
Unsurprisingly, the services, constructions and production sectors all saw record quarterly falls, according to data compiled by the Office of National Statistics (ONS).
‘The economy began to bounce back in June with shops reopening, factories beginning to ramp up production and housebuilding continuing to recover,’ ONS Deputy National Statistical for Economic Statistics Jonathan Athow said.
‘Despite this, GDP in June still remains a sixth below its level in February, before the virus struck,’ he added.
UK economy expected to bounce back in Q3
Economists are predicting the UK economy will bounce back in Q3, with British businesses emerging from lockdown and finally able to reopen their doors.
The Bank of England forecast an 18% jump in economic activity in Q3, with the 8.7% bounce the UK economy mustered in June a positive sign for the future. However, it is worth noting that the UK’s economic recovery rests on it avoiding a second wave of coronavirus cases.
The UK government has also announced that its furlough scheme, which subsidises the wages of million of employees that would otherwise be cut due to the economic fallout of Covid-10, will come to an end in October.
FTSE 100 pushes higher
The FTSE 100 index has recovered from its overnight weakness, retreating towards 6120 before resuming its move higher towards 6200, according to Chris Beauchamp, chief market analyst at IG.
‘Above this a new higher high is created, and would mark a further reinforcement of the current bullish view,’ he added. ‘A reversal below 6100 would suggest some more short-term weakness.’
FTSE 100: After-hours trading with IG
IG offers extended hours trading options for the FTSE 100 index and other major indices. Buy long or sell short on the FTSE 100 via CFDs and other instruments provided by IG's market-leading trading solution. Start by opening a live or demo account with IG today.
IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.
The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.
Please see important Research Disclaimer.
Take a position on indices
Deal on the world’s major stock indices today.
- Trade the lowest Wall Street spreads on the market
- 1-point spread on the FTSE 100 and Germany 40
- The only provider to offer 24-hour pricing
Live prices on most popular markets
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.