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.’

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