Tuesday, January 28, 2014

Gross Domestic Product (GDP) in the UK | Stocks and the real economy

Gross Domestic Product (GDP) in the UK rose just under 0.8% in the third quarter of 2013. Figures for the fourth quarter are out this morning and are eagerly awaited. The reason for this is that if they are as good this time round it will complement very nicely the pleasant surprise that was granted by the figures for employment last week, which caused a surge in Sterling.

One of the most interesting aspects of the GDP figures for the third quarter is that all sectors of the economy made a positive contribution. Agriculture, manufacturing, construction and services all came to the table with positive numbers. A repeat of this type of outturn for Q4 will possibly see Cable (GBPUSD) move in breakout mode through the 200 period SMA on the monthly chart, which has defined its upper limit since the dramatic falls that took place at the outset of the Great Financial Crisis in late 2008 (see chart below).

A move of this sort would be the best signifier yet that the hangover from the crisis is at last being cured.

Stocks and the real economy

As we reported recently, a new voting member of the U.S. Federal Reserve, Mr. Fisher of the Dallas Fed, is on record as saying:

“'Were a stock market correction to ensue while I have the vote, I would not flinch from supporting continued reductions in the size of our asset purchases,' He said 'as long as the real economy is growing, cyclical unemployment is declining and demand-driven deflation remains a small tail risk, I would vote for continued reductions in our asset purchases, with an eye toward eliminating them entirely at the earliest practicable date.'

The current turmoil in the equity markets and emerging market currencies is nothing more or less than a return to normality after the crisis. The measures taken to avoid recession and depression were what drove up equities and those same currencies in the first place, so when the stimulus measures are withdrawn it is only reasonable to expect that they, too, will also reverse.

We can be confident that Mr. Fisher’s sentiments are shared by most if not all of his colleagues on the US Federal Reserve. The current fun and games represent a transition stage that will work its way out. What we have to do in the meantime is to keep our powder dry for when the turmoil is over. In the meantime we watch and wait.

In particular, we will be keeping a close eye on both the USDJPY and USDCHF pairs to with a view to them beginning to appreciate in the not-too-distant future. Both JPY and CHF have been safe haven currencies in the last few trading days, at a time when safe havens should not really have been needed.

1 comment:

  1. Here hoping. But your algorithmic strategy does not take into consideration of the dismal unemployment rate and the cost of fostering those who depend on the social structure and support to stay alive. should there not be a base line for the standardization of the constant cash expenditures to level the field and give a true reading about the actual contributions and the valuation of any forward contributions.