Economic recoveries very rarely improve in a straight line, and those following a pandemic are especially likely to see large fluctuations

  • 8th September 2020

What has happened

While US markets were closed for Labor Day on Monday, European markets started the week in more confident mood, shrugging off the higher volatility that had beset US indices and technology shares in particular at the end of last week. Supporting European shares, both the Euro and Sterling currencies fell back against the US dollar, albeit for different reasons. For the Euro, markets remain hopeful that the European Central Bank (ECB) might present a dovish tone to their meeting on Thursday. For Sterling, the UK’s sabre-rattling with the EU over the shape of a future trade deal or even the threat of no deal at all, weighed on the pound which was the worst performing G10 currency yesterday.

UK and EU trade risks rise

Today, the EU’s chief Brexit negotiator Michel Barnier is due to arrive in London to meet his UK counterpart David Frost as well as UK PM Boris Johnson for the eighth round of trade talks due to run for 3 days through till Thursday. The back-drop looks less than ideal however, as news reports emerged over the weekend that the UK government is seeking to introduce an internal market bill that might overwrite parts of the UK-EU Withdrawal Agreement regarding Northern Ireland, including areas of state aid and customs. Ahead of the bill being published on Wednesday, UK PM Johnson was in damage-limitation mode on Monday suggesting in a call with French President Emmanuel Macron that the changes were ‘limited’ and technical, and that the UK stood fully behind the Withdrawal Agreement. Despite the rushed diplomacy, UK PM Johnson has nonetheless ratcheted the pressure on talks by setting a deadline to agree a deal by mid-October. By declaring that a no-deal would be a ‘good outcome’ markets are left trying to determine if this is a negotiating tactic or serious intent.

German industrial production loses steam

German industrial production numbers for July were released on Monday, fuelling concerns that the eurozone’s nascent recovery might be running out of steam. With a month on month (MoM) rise of just +1.2%, this not only missed consensus expectations of +4.7%, but it also marked a sharp deceleration from June’s +9.3% MoM. A concern for the export-led economy and the eurozone’s largest, this followed last week’s weaker than expected German factory orders. While it is important to keep in mind that this is only a single data point, its timing, coming ahead of the ECB’s monetary policy meeting this Thursday could be significant.

What does Brooks Macdonald think

Economic recoveries very rarely improve in a straight line, and those following a pandemic are especially likely to see large fluctuations in underlying data from month to month. However, that markets have looked through some of the more weaker data and coronavirus news flow recently, suggests that for now there is a higher confidence in policy makers continuing to provide a pressure release-value for risk appetite as and when needed. As such, whether it is the hope for renewed central bank accommodation or additional government spending commitments, any disappointments versus expectations here might be keenly felt by markets.

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