Lockdowns send UK into contraction

November GDP data highlights another services-led contraction for the UK economy. While Biden's stimulus package will help, the detrimental coronavirus lockdown effects will continue to hold back sentiment.

• Coronavirus lockdowns damped sentiment.

• UK economy contracts, with services at the forefront of lockdown-led losses.

• Biden stimulus package should help lift the banking sector. 

European markets are ending the week on a somewhat sour note, with fears over increased lockdown measures in Germany, France, and China denting sentiment. A slump in UK GDP for November highlights the detrimental impact lockdown measures are taking on economic growth, and the highly infectious forms of the virus now evident in the UK, South Africa, Brazil, and Japan do raise the risk of further nationwide lockdowns as the virus spreads. Vaccination efforts will help lift sentiment over time, yet the long-term nature of those efforts mean traders are instead focusing on the economic havoc this virus will wreak in the meanwhile.  

The UK rather predictably dipped back into contraction territory in November, with government lockdown measures reversing the gradual recovery that had been underway over recent months. Nevertheless, with the -2.5% reading came in well above the dramatic -4.6% contraction forecast by many, it is clear that businesses are finding smarter ways of operating compared with the first lockdown. Services have predictably borne the brunt of these measures, with the often face-to-face nature of certain sub-segments meaning that continued operations are not possible. With GBPUSD falling sharply over the course of this morning, it is clear that traders are focusing more on the fact that we are set for a protracted period of contraction than the better-than-expected nature of today's GDP reading.   

It appears to be a case of buy-the-rumour-sell-the-fact for markets as they acted with a shrug to a stimulus package that has been months in the making. While bulls have been crying out for a fresh cash injection to stave off further economic suffering, the minimal market reaction highlights the fact that markets have largely factored in such a package given the recent Democratic success. Nevertheless, with US bank earnings coming into the fray today, it should be noted that Biden’s stimulus package does plenty to help stave off the kind of business and consumer suffering that will often result in substantial write-downs for lenders. Thus while the banking sector does remain restricted by the depressed interest rates, the unprecedented spending programmes from the likes of the US and UK governments will help shield financial services from bearing the brunt of the ongoing Covid restrictions.  

Ahead of the open we expect the Dow Jones to open 59 points lower, at 30,933.