Markets Weekly

21 February 2020

4 minute read

Week ahead

As financial markets approach the end of February, the growth seen in the final three months of 2019 (Q4) takes centre stage. Germany’s second estimates of Q4 gross domestic product (GDP) kicks the week off. The first estimate showed that output was flat on the quarter as the export-oriented economy continues its struggles.

Despite early signs in January of a recovery in the country, recent survey data, such as the ZEW economic sentiment indicator, have been noticeably weak since the Covid-19 coronavirus outbreak. Markets will also be focused on Germany’s February Ifo Institute business climate data on Monday.

The impact of the Covid-19 outbreak on the US consumer, who has been fundamental to US growth for some time, will be reflected in the consumer confidence survey out on Tuesday.

The US second estimate of GDP growth for Q4 follows on Thursday. The market expects growth of 2.1% in the first estimate to be confirmed. The core personal consumption expenditure data for Q4 (also that day) is likely to show inflation remaining muted, again questioning the central bank’s efforts to achieve its goal of ending the disinflationary trend that has been prevalent in the US.

The UK housing market appears to be showing early signs of a post-election boom, according to survey data. The Nationwide house price index published on Thursday will show if the upturn has legs, after the index rose to a fourteen-month high in January.

Chart of the week

UK housing shows signs of rebound, but uncertainty looms

While UK house prices grew by 2.3% year-on-year in December, it was the first time since February 2018 that all regions saw positive annual growth and better than 2018’s disappointing 0.1% growth. However, the figure is still below the 4.5% seen in 2016 and a far cry from 2014 levels.

The effects of elevated levels of political uncertainty, tighter lending standards and unfavourable changes to tax rules on the housing market explain the downturn in growth somewhat.

However, political uncertainty appears to have moderated with December’s election of a Conservative party with a strong majority and the UK’s subsequent departure from the European Union (EU). Also, the prospect of some fiscal easing at March’s budget and historically low interest rates provide a healthy environment for the consumer.

Since the December election, survey data suggests that a post-election bounce in demand is underway (see chart). The Nationwide and Halifax surveys both showed an uptick in house price growth which surged to 14-month and 2-year high in January respectively. February data from Rightmove showed prices of properties coming to market just below a new all-time high from June 2018.

Chart of the week

The demand and supply fundamentals suggest a stable housing market. However, an agreement to leave the EU and a trade deal with the bloc are two very different things. Growth could be impeded if the latter fails to materialise at the end of the transition period, scheduled for the end of the year, and potentially offset the positive impact from foreign buyers attracted by a likely weaker sterling.

Furthermore, even if a deal is reached and a no-deal scenario avoided, the housing market is unlikely to generate the returns seen in the past decade over the next one.


Negative interest rates – Quo vadis?

Just when will the eurozone central bank heed calls for higher rates to aid savers and how should investors position portfolios to counter the negative wealth effects of a sub-zero interest rate policy?

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