SPREAD BET GURU
MARKET STRATEGIST
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Q. Dear Josh, how serious is the threat of a double dip recession in the UK?
A. The moves in the markets last week show you just how concerned investors are that a dip back into recession could be a real possibility for the economy. If you take a look at the behaviour of bond markets of late, they clearly point to the fear of troubling times ahead. The yield on two-year US Treasury bonds, for example, reached levels not seen since the Great Depression back in the 1930s. But when markets start to plunge it’s not uncommon that some people start making assumptions about a possible market apocalypse. If you do a Google search I’m sure you will find the same predictions of doom back in 2001-2002, when the dot.com bubble burst, and after the 1987 stock market crash, so perhaps take these predictions with a generous pinch of salt. That said, UK GDP predictions were revised lower in the emergency budget to 1.2 per cent for 2010 and 2.3 per cent for 2011, with net exports and business investment making a greater contribution to growth than in the past. One troubling element is the fact that UK exports have not, as of yet, picked up as much as many may have hoped, despite the weak pound. Last week’s PMI data showed that export orders slumped to 50.7 for June, a steeper fall than expected. This raises concerns that the sovereign debt crisis in Europe (a major trading partner of the UK) and the subsequent weak single currency, which now only buys 82p for every euro (down from 92p in March), is having a significant effect on demand for UK-made goods. Fears about a double dip, combined with continuing fears about the European debt crisis has led to a flee away from risky asset classes such a stocks.
Q. Dear Josh, the US unemployment rate fell last week. Does this not indicate that the US recovery is gaining strength?
A. The labour market data in the US is crucial for the financial markets, and asset prices are very sensitive to changes in this figure. But, although the headline non-farm payrolls figure is important, you need to take a deeper look into the breakdown of Friday’s data, which indicates a rather mixed picture. On the positive side, the US unemployment rate surprisingly fell to 9.5 per cent when it was expected to increase to 9.8 per cent. But on the negative side, private payrolls did not grow by as much as expected, only rising to 83,000 when a steeper growth of 112,000 was expected by the markets. Overall, the nonfarm payrolls figure fell for the first time this year and the US economy lost 125,000 jobs, but this had been expected by the market. Unfortunately, all of the good news from the fall in the unemployment rate has been watered down by the weaker growth in private sector jobs, which has led some in the market to worry about the sustainability of the US economic recovery.