As we move through the European trading session on Wednesday, there is residual optimism in the market that continues to boost risk sentiment. European indices are having another strong day, although the FTSE 100 is bucking this trend and is posting a small loss. US futures suggest a higher open later today and pre-market trading suggests that the tech sector will open higher this afternoon.
US reopening hopes rise
The prospect of an end to the US government shutdown later today is fueling demand for risk assets. The end of the shutdown is positive for financial markets as we should get a clear read on economic data in the next week or so. Some analysts expect the delayed CPI and labour market data to be released next week, which will give us a read of the underlying strength of the US economy. Investors appear to be positioned for this data to be risk-positive, however, proof is needed, which means that the delayed US data releases are high stakes for financial markets.
FTSE 100’s tremendous resilience to domestic threats
Looking at the FTSE100’s underperformance today, communication, consumer discretionary and the real estate sector are all acting as a drag on the index. There are concerns about economic growth, including a downbeat update from FTSE 250 homebuilder Taylor Wimpey, who said that tax changes in the budget could impact home sales. When home builders slow, it can be a lead indicator for economic weakness, which could thwart FTSE 100 gains in the short term.
However, the FTSE 100 has been tremendously resilient to weaker growth, budget risk and political noise this year. On a YTD basis, the FTSE 100 is outperforming the S&P 500, the Eurostoxx 50 index and is performing at the same level as the Nasdaq. The UK index is higher by more than 21% on a USD basis and 26% on a currency-adjusted basis. Not bad, considering how the UK is portrayed in the media.
Volatility picked up during shutdown
Stocks have been slightly more volatile during the shutdown, as you can see in the chart below, however, the Vix index remains below the average of the last 12 months at 17. Nevertheless, stocks have lacked a clear driver in the past few weeks, and this has been reflected in an uneven performance for the biggest tech stocks, as momentum, which had been the biggest driver of stocks this year, has now become a drag on US stocks.
Chart 1: The Vix index
Source: XTB and Bloomberg
Without momentum, it’s been hard for stocks to catch a long-term trend, and this is why the S&P 500 has not made a fresh record high since the end of October. The focus will be on the government reopening, and whether that builds momentum in the stock market, which allows US indices to return to record highs.
UK Gilts mild reaction to Starmer coup could bode ill for the PM
UK assets are also in focus this morning, including the bond market. UK Gilts are the weakest performers in Europe so far this morning, after reports surfaced last night, that a coup could take place in the Labour Party to oust Prime Minister Kier Starmer, potentially after the Budget. This morning, the chief suspect, Wes Streeting, denied claims that he was trying to become the next PM.
UK bond yields are marginally higher on the back of this political chaos, the 10-year yield is higher by 2.7bps, and the 2-year yield is higher by 1.7bps. This is a small move and does not compare with the bond market tantrum in the summer when rumours circled that Rachel Reeves would be sacked. The bond yield spike back in July helped Reeves keep her job, the question now is, will a mild reaction to the prospect of Kier Starmer being overthrown as PM embolden his potential successors?
Reeves and Starmer’s swing to the left on public spending and tax rises has been well absorbed by the bond market so far, since a tax increase could build a structural budget surplus for the UK, even if there is a hit to growth. Ironically, this could make Reeves’ and Starmer’s jobs less secure, as the political chaos threatens the UK once again.
Pound takes the brunt of UK issues
The pound remains unloved. A weaker economic picture, and more political woes is weighing on Sterling, which is the second worst performer in the G10 FX space on Wednesday. November has been a tough month so far for the pound. It is weaker vs. the USD, and in the past month GBP/USD is down by 1.5%, suggesting that budget concerns, growth issues and now political woes are a toxic mix for FX investors.
Elsewhere today, investors will be laser focused on the outcome of the House of Representatives vote on ending the government shutdown. Any delay to this could rapidly sour risk sentiment.
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