August 12, 2020

European Markets Follow the U.S Lower

European Markets Follow the U.S Lower

European markets are picking up the momentum from the U.S. markets, which came under pressure during the final hours of trading. The Dow Jones which enjoyed the majority of the day in positive territory and the S&P 500 index that almost retested the all-time high, changed direction chiefly because of lack of optimism about the next stimulus package from Washington. The policy makers are still very much stuck in a deadlock situation in terms of their negotiation over the next stimulus package. As a result, stock traders started to book some profit off the table.

The UK was in Recession in Q2

Over in Europe, it is all about the U.K.’s second quarter GDP number. The UK was said to be in recession in Q2. The number was jaw dropping, the U.K.’s GDP dropped to 20.5%. The U.K’s economy has not produced this sort of number in a very long time. The U.K. economy was set to plunge nearly 18% and some of the estimates were even worse. Analysts were expecting the U.K.’s GDP to plummet as much as -25%. The GDP number for the first quarter confirmed the GDP contraction of 2.2%.

The more influencing factor that needs attention is that how fast this number can bounce back going forward. For the U.K. GDP to drop this adversely was something that the market was expecting, especially given the fact that the U.K’s economy is very much service dependant.

U.K’s Economy Comes to a Halt in Q2

During the second quarter, the U.K.’s economy came to a near stand still. The reason that we have seen a bounce in the sterling is purely because traders were focusing on U.K.’s GDP expansion in June. For traders, it is not about the depressing contraction number for the second quarter GDP, for them it is about the pace of acceleration which clearly shows that the worse may be behind us. Any number which is beyond the 20% contraction figure serves a dangerous territory. That’s because the bounce back may not be able to push the economy back in the expansion territory as rapidly as hoped.

Given the fact that the U.K. has opened after the coronavirus lockdown—although regional lockdowns are back to some extent and they are likely to extend as well—the low point in terms of economic activity in the U.K. maybe behind us.  From here onward, the U.K. economy may not experience a similar plunge in the GDP. Although, any optimistic picture or acceleration in the U.K.’s economy is likely to be met by its upcoming Brexit-related challenges.