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Investing.com — It’s not only U.S. investors who can ignore bad news.
Europe’s stock markets are finishing the week on a hopeful note, underpinned by the injection of another 540 billion euros through the European Central Bank’s ‘TLTRO’ operation on Thursday, and supported also by a rebound in U.K. retail sales that was at the top end of expectations.
The U.K. data were, however, only superficially positive. While overall sales rose 2%, rather than the 5.7% consensus estimate, they were still down over 13% on the year, and it can hardly be imagined that they will recover last year’s levels if the current pace of job-shedding continues. Over 1.5 million Brits have filed for jobless benefits in the last two months, despite what initially appeared to be a substantial and comprehensive job protection scheme.
Add to that the lack of meaningful progress in avoiding a cliff-edge effect when the post-Brexit transition period for trade with the EU ends in December and the government’s continuing struggle to bring the Covid-19 pandemic under control, and it is all too easy to see how the U.K. economy can turn down sharply again in the second half of the year.
At the same time, the Bank of England is slowing the rate of its bond purchases, even though it increased the overall envelope of its asset purchase program by 100 billion pounds – the bottom end of the range of expectations ahead of Thursday’s Monetary Policy Council meeting.
That doesn’t look too clever at a time when the public debt is exploding, rising above 100% of GDP for the first time in 47 years in May thanks to the surge in government borrowing to cope with the pandemic. The best case that can be made for the Bank’s caution is that it is holding back some ammunition in case of another downturn later this year.
Britain’s twin deficits, as former Bank of England Governor Mark Carney repeatedly said, leave it dependent on “the kindness of strangers” and their willingness to finance those deficits. That’s especially true if the Bank is going to ease off the gas.
No surprise, then, that such gains in U.K. stocks on Friday are due largely to the pound sliding to a three-month low against the euro and its lowest in nearly three weeks against the dollar.
In fairness, domestic-themed stocks are also showing pockets of strength, with fast-food chain Greggs up 1.7% after laying out its reopening plans earlier in the week and retailers Next (LON:NXT) and Kingfisher (LON:KGF) also reacting positively to the retail sales numbers. Most homebuilders are also in the green after two well-received capital increases in the course of the week, Taylor Wimpey (LON:TW) leading the way with a 3.9% bounce.
Even so, the FTSE 100 and FTSE 250 remain the worst performers in Europe this year (after Spain) for a reason. Until the macro backdrop improves, and specifically, until the U.K. government proves it can manage either the pandemic or the Brexit process better than its continental brethren, there seems little reason to expect that to change.
