As we end the week a few themes have emerged that could drive market sentiment as we move through to the end of the year. The UK’s economy is in an even worse position than first thought, the Fed could be done with easing at the same time as its back buying billions of dollars’ worth of Treasury bills, the ECB’s next move may be a hike, defense stocks are likely to remain in demand after the NATO chief said that Europe must prepare for war with Russia, and there are still concerns about the AI trade.
Strong year for stocks, as Europe pulls ahead of the US
Global stock markets are still pushing higher after a strong 2025 for returns. European and US stock markets are posting gains for the week so far, with European indices outperforming US indices for the second week of December. The Eurostoxx index is higher by more than 1%, the FTSE 100 is up 0.7%, while the S&P 500 is higher by 0.6%,m and the Nasdaq is up by 0.3%. European stock indices are higher today, however, US futures are pointing to a weaker open for the US markets later today.
Market continues to shun Oracle, as AI fears build
Second tier tech stocks weighed on the main US index on Thursday, including Oracle, which slid 10% on the back of disappointing earnings data and a lower-than-expected return from its AI spend. In pre-market trading, Oracle is lower once more on Friday. Robinhood Markets was also a drag on the index, and slid by 9%, as the lack of volatility in equity markets and the continued subdued performance in Bitcoin hurt trading volumes. This contrasted with a strong performance for cruise operators and credit card company Visa. This is further evidence that a new trend is emerging, with cyclical stocks and consumer-linked US companies outperforming the tech sector. The equal-weighted S&P 500 has broken away from the market cap weighted S&P 500 this week, which may continue as we move through to 2026.
The UK’s economic doom loop: We buy more as we produce less
The disappointing UK GDP reading for October was the dominant theme for markets this morning. Growth declined by 0.1%, instead of rising by 0.1%, as economists had forecast. This means that the UK economy has not grown since June, and there could be worse to come. The ONS, who compiled the data, said that services showed no growth, while construction fell by 0.3% and production also slipped by 0.5%. Meanwhile, the total trade deficit widened by £4bn to £6.7bn in the three months to October. Trade in services was in a surplus and has been mostly stable and in a mild uptrend this year, while the trade in goods has seen a widening of the deficit in recent months.
It is important to read the GDP data alongside the trade data. Together, they suggest that the UK economy buys more while it produces less. If the Labour government wants to boost growth it needs to break this pattern. Without a doubt, exceptionally high energy prices compared to our peers is hurting how much we can produce and manufacture in the UK. Without significantly changing how the UK charges for energy, the UK economy is doomed to a subdued economic performance for the long term.
Jaguar Land Rover fails to boost the UK economy
The cyber-attack on Jaguar Land Rover continues to have an impact on the UK’s production data. The ONS said that the decline in production was down to a fall in the manufacture of cars and trailers. The expectation was that there would be a bounce back in production due JLR restarting production in October, however, it was a phased re-start and may take some time to feed through to the data. Combined with a weak service sector, the UK economic outlook is moving from looking precarious, to looking doomed.
Stagflation looms for UK
The UK economy is now facing the spectre of stagflation, the worst of all worlds, which could further weigh on the economic outlook and the jobs market. Due to this, next week’s CPI data will be crucial for the outlook for UK rates and could cause significant volatility in the pound and the Gilt market.
The announcement that Google Deep Mind will build its materials science lab in the UK is undoubtedly good news, but it is not enough to deflect from the damage that the current economic policy direction is taking us in.
Without a strategic shift from government, UK economy could get worse
The UK is now considered a high tax environment to fund an ever-bloated public sector. Just 18 months of a government with a desire to punish the private sector and penalize taxpayers has already caused economic stagnation. With the Chancellor refusing to rule out further tax rises, it is no wonder that the pound is sliding and the UK Gilt prices are lower today. This should be a wake-up call for the Chancellor to ditch the Torsten Bell model of running a Budget and switch to a sensible economic plan, which grows business and consumer confidence and provides a bigger pie for all. Right now, the pie is getting smaller, as the burdens on the state get bigger.
Source: https://www.fxstreet.com/news/uk-economy-faces-stagflation-risks-as-oracles-stock-continues-to-slide-202512121053
