UK services in decline, exacerbating growth fears

Fears over a US slowdown are being joined by UK anxiety, with the critical services sector shifting into contraction once more.

• UK stocks decline once again, with growth and trade war fears hitting sentiment

• Growth fears drive traders into haven assets

• UK services slips into contraction, ramping up growth fears

The FTSE 100 is back in the red today, as fears over the global growth picture and a tit-for-tit trade war between the US and EU continue to dent sentiment. The huge losses seen yesterday have eased somewhat in Europe, with traders taking stock after a huge slump in global markets. However, fears over US growth prospects have been joined by the UK, with the contraction in UK services pointing towards a growing fear for UK Q3 growth figures. Once again, we are seeing traders shift into haven assets, with bonds, gold and the yen coming into favour. With central banks already running highly accommodative monetary policy, there is a fear that they will have little ammunition if current
recession fears prove correct.

The UK services sector tilted into contraction in September, with the third and final PMI reading of the week completing a trio of sectors in decline. While the UK economy has fared better than many had expected owing to the lessened reliance on trade war impacted manufactured goods, we are now seeing the all-important services sector fall into decline for the just the second time in two-years. With the decline in new and current business coupled with expectations hitting multi-year lows, there is little reason to expect this contraction to be a one-off month like the previous dip. Crucially, while this marks the fifth period of contraction since the financial crisis, we are yet to see a protracted decline in services over the last decade. Thus, for markets the key here is whether this will be a protracted contraction in UK services, with such a move likely to drive the country into a recession.

Ahead of the open we expect the Dow Jones to open 6 points higher, at 26,085.