GBP higher after eventful day; Stocks remain well supported

Summary:

• Pound gains after data beat and Brexit deal hopes

• Slight pullback seen as House Speaker Bercow stands down

• DE30: No-deal Brexit will push Germany to stagnation

• S&P500 back near 3000 mark

• AT&T gains after activist investor announces stake 

The pound has kept traders busy today, with a flurry of headlines but as the dust settles it looks like another daily gain for the currency as the recovery which began last week extends further. A plethora of UK data points have painted a surprisingly healthy picture of the UK economy with the standout being a GDP print for July of +0.3% M/M. Following a flat reading in June this is a positive surprise and the accompanying rise in manufacturing production is also pleasing. While the figures are from from stellar, after a contraction in the second quarter the chances that we see a negative GDP print in the third have now dropped significantly, meaning that a technical recession will likely be avoided. Conciliatory remarks from PM Johnson on the backstop ahead of a meeting with the Irish PM Varadkar also provided a boost, even if they amount to little more than that at present. 

News heading into the European close that UK House speaker John Bercow will stand down from his role immediately if the UK parliament votes for an election and failing that, he will step down on October 31st caused a dip in the GBP as the earlier gains were pared. The pullback came as Bercow was seen as on the side of “remain” in the Brexit debate but after the initial selling the market has recovered and trades back near its daily highs at the time of writing. 

Having in mind that Brexit developments should be on top of investors’ interest another week on the trot, it is important to look at the latest report from the Federation of German Industries. The institution expects the German economy to grow by a mere 0.5% this year, down half a percentage point compared to the industry group’s forecast released in June. Moreover, it estimates that this result could be even worse if the United Kingdom crashes out of the European Union without a deal at the end of October. Should it happen, economic growth could fall to zero. In its report it also wrote that economic uncertainty remains high, because of global trade tensions and Brexit. Finally, the institution has urged the German government to change its fiscal policy to buttress stuttering growth. Meanwhile, a German current account surplus widened in July to 22.1 billion EUR compared to upwardly revised 20.9 billion EUR in June. As a result, after July the surplus increased to 7.3% from 7.1% of GDP, the highest value this year. In our view, if this trend keeps unfolding, it could heat up a debate regarding a need to loosen the purse strings in the German economy at a time when Europe needs it.

Equities have made a fairly solid start to the new week with major benchmarks in Europe in the green and the German Dax trading back above 122000 and at its highest level in over 5 weeks. The moves appear to be little more than a continuation of what we saw last week as stock markets enjoyed impressive gains across the board. A soft NFP release and slightly less dovish than expected speech from Fed chair Powell on Friday evening failed to impart any significant sell-off and after a rock August, September is providing a far more sanguine environment for investors so far. The S&P500 made a new 5-week high at 2991 before the opening bell and while it has dipped since, it still remains not too far from this level and the psychological 3000 handle. 

Shares in AT&T jumped this afternoon after activist Elliott Management announced a $3.2B stake in the firm. The activist investor led by Paul Singer sent a letter to the board of directors for AT&T with suggestions for business improvements and believes the company’s stock could ultimately go as high as $60 per share - around 65% above Friday’s closing level of $36.25. “The purpose of today’s letter is to share our thoughts on how AT&T can improve its business and realize a historic increase in value for its shareholders,” the memo states. “Elliott believes that through readily achievable initiatives -- increased strategic focus, improved operational efficiency, a formal capital allocation framework, and enhanced leadership and oversight -- AT&T can achieve $60+ per share of value by the end of 2021.” The stock began higher by a little over 4% but has drifted back a bit since.