The FTSE-100 continues to move upwards despite the news that the UK economy suffered its worst ever fall in the second quarter.
Thanks to a weaker dollar, signs of a slowing coronavirus spread as well as hopes for new stimulus propelling British equities higher, the index recently closed at a two-month high of 6280.
The Footsie’s performance has been echoing similar strong gains across European indices, taking its cue from the ebbs and flows of the US economy.
Even though Britain’s gross domestic product plunged 20.4% in the three months from April to June — the worst performance of any major European economy during the pandemic – the pound is also holding steady and largely unmoved against the US dollar.
The UK’s blue-chip index is performing well too, with investors hoping the recession will lead to more stimulus. Bank of England deputy governor Dave Ramsden had said that the central bank would step up quantitative easing if the economy slows and struggles again.
News of stimulus package leads to strong gains for key stocks
Reports that a US capital gains is in the offing has helped boost share prices across global financial markets. US Treasury Secretary Steve Mnuchin indicated he was prepared to engage with Democrats to get a deal done. Most markets are under the assumption that such an agreement is merely a matter of “when, not if.”
As a result, strong gains for key stocks, including oil major Royal Dutch Shell RDSA and HSBC HSBA helped the FTSE-100 higher, as Chris Beauchamp of IG explains:
“The former [Shell] has gained thanks to renewed strength in the oil price, while a lack of further developments in US-China tensions has allowed HSBC and Asian peer Standard Chartered STAN, to make up some lost ground.”
Other stocks worth mentioning include Just Eat Takeaway, which rose 3.2%, after the food delivery company reported surging revenue and orders in the first half of the year when it benefited from coronavirus lockdowns across Europe.
Admiral Group shares also climbed 7.3%, as the UK-listed insurance company said it would pay the special dividend it deferred at the height of the pandemic after a 31% rise in first-half pretax profit.
State of the UK economy
Figures from the Office for National Statistics (ONS) confirm that the UK economy entered a recession after the COVID-19 outbreak spread in March.
After resisting the launch of a lockdown until later than other countries and relaxing controls at a slower pace, the ONS said the UK had plunged into the deepest decline of any G7 nation in the second quarter.
While the 20.4% fall in GDP beat expectations of a 21.2% drop, it is double the hit taken by Germany, the largest national economy in Europe. The UK’s recession is also more severe than that of hard-hit countries Italy and Spain.
But in the opinion of Dean Turner, UBS Global Wealth Management economist, the worst was behind the UK economy.
“In our view, UK assets look undervalued. In this environment we continue to maintain a preference for UK equities relative to other eurozone stocks, and expect sterling to strengthen versus a weaker dollar over the next 12 months,” he added.