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The Trader: UK growth cools and is there still more downside to this market pullback?

London shares have recovered some of the ground lost yesterday
The Trader: UK growth cools and is there still more downside to this market pullback?


  • UK growth appears to be slowing - can it pick up again post 'freedom day'?
  • First signs inflation may be cooling
  • Us bond yields rally

Reopening can’t come soon enough: UK GDP expanded by a meagre 0.8 per cent in May, led by indoor hospitality, but held back by a global chip shortage hitting car production. The monthly growth rate was below the 1.5 per cent forecast and leaves the economy 3.1 per cent below its February 2020 pre-pandemic size. 

Stocks sold off on Thursday. The kind of worries that have seen narrowing breadth and overbought conditions for the major indices broke over the broader market. Concern about China regulatory pressure on big tech, and concerns about antitrust stuff in the US have gnawed away at the margins. Worries about the rise of the Delta variant globally are also a factor - Tokyo’s decision to ban spectators was taken as a warning that Covid the pandemic is far from over. The biggest worry it seems it this sense that we have hit peak growth – and hit peak expectations a couple months back as evidenced by the top in the commodity market. The last one-two months has seen mega cap growth do all the lifting as the reflation trade unwinds but even with lower rates we saw the market come off yesterday, so there is just this broad sense of being overblown after a 5 per cent rally for the S&P 500 in the last fortnight, while the Treasury market is not making much sense at all and the recent plunge in yields is apparently without any justification and being explained away as a technical thing. This is true but it is not entirely the whole story, and we now face the risk of the 10yr being at 1 per cent at year end and not 2 per cent. Or at least that is what the market seems to be saying – in fact I’d expect once this flushing out of the market (painfully), normal service will resume with the Fed beginning to signal the taper in Aug/Sep. 

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