It’s not been a great first half of the week for UK asset prices. The FTSE 100 slumped 1.2% yesterday and fell to its lowest level since August. It outperformed other European indices, but it was still outshone by US indices, and they experienced a milder decline. However, at the start of trading on Wednesday, a recovery rally is taking shape. The pound has also suffered a bruising week so far, and GBP/USD is down more than 1%.
FTSE 100 in recovery mode
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Open account Try demo Download mobile app Download mobile appThe FTSE 100 fell on Tuesday on the back of large losses for big hitters like Vodafone, Fresnillo, Prudential and Anglo American. However, the FTSE 100 is one of the only European indices in the green on Wednesday, as Astra Zeneca and Rio Tinto lead the recovery. The top performers on the FTSE 100 today are a broad mix of miners, pharma, insurance and retail, which may give this recovery some legs.
The question is why the FTSE 100 seems relatively protected from the stock market sell off, but the pound is the weakest currency in the G10 FX space this week? Stock markets are moving on the back of US politics and the unveiling of Trump’s economic agenda, but they are also moving on the back of earnings news. The FTSE 100 has outperformed the Eurostoxx 50 for Q3 earnings season. FTSE100 earnings have surprised on the upside, while earnings growth has disappointed so far for the European index. A stronger showing for Q3 earnings season, hopes that Trump will take pity on the UK and give us some sort of trade deal and immunity from tariffs, and political discord in Germany and the EU, is providing a shield for UK stocks, which may limit the downside if the global sell off continues.
Dollar destroys everything in its path
The story for the pound is different. There has been a structural shift towards a stronger dollar that is destroying everything in its path. EUR/USD could reach parity, USD/JPY is close to intervention territory and GBP may head back towards $1.25 vs. the USD. The FX market tends to concentrate on one theme at a time, and right now that is dollar dominance.
The pound is the weakest performer in the G10 FX space this week. GBP/USD has fallen more than 2% since Trump was elected. The pound and the euro have been hit hard by Trump’s election win, relative to other G10 currencies, because they are more exposed to Trump’s policy agenda. While there are hopes that Trump will look favorably on the UK, unlike the stock market, the FX market is not trading on hope at this stage.
FX market continues to discount Trump’s win
The FX market is straight forward: the dollar is king; the market is still discounting Trump’s win and there could be further to go. The dollar has surged higher since the start of October and the dollar index is now at its highest level since May. 107.50 is now a key resistance level.
The dollar is continuing its climb on Wednesday, and there is also volatility in the bond market. Sovereign bond yields in the UK and Europe are higher across the curve, however, US yields are rising at a moderate rate. Today’s CPI report in the US will be watched closely, however, we don’t think that today’s bond sell off is due to fears around October CPI. Headline CPI is expected to tick higher to 2.6% from 2.4%, and core prices are expected to remain steady at 3.3%. This is the first of two CPI reports before the next FOMC meeting, thus as long as it comes roughly in line with expectations, it may only have a limited impact on financial markets.
Higher yields on the agenda for the US
Overall, we think that the win for Trump will lead to higher yields in the US vs. Europe over the long term. US 10-year Treasury yields have risen by 33bps in the past month, that compares with 28bps for the UK and 11bps for Germany. In crude terms, this is a sign that Trump’s win could lead to strong economic growth in the US that is inflationary. The rise in UK bond yields is a mixture of fears over the Budget, and it could also be a sign that the UK economy could benefit from a Trump presidency, however, that theme is in its infancy, and we don’t think that it is a given at this stage that the US will look favorably on the UK. However, the weaker bond yields in Europe, could be a sign that the bond market thinks European economies could be left out in the cold by Trump.
Elsewhere, bitcoin is lower on Wednesday, although Dogecoin is higher, now that Elon Musk has been confirmed as one of President Trump’s hires for his administration and Musk is a big supporter of dogecoin. Klarna, the buy now pay later firm, has submitted plans to the SEC to list its shares in the US. There had been speculation that Klarna could list in the UK, however, this is another example of a tech company choosing the US over the UK. Trump may accelerate that trend, with the prospect of looser regulations and a booming stock market attracting IPOs to the US.
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