UK as a Leading Indicator for US
“When America sneezes the UK catches a cold.”
Such has been the accepted logic in financial markets for decades now. The logic being that as our largest trade partner outside of the EU – together with it’s sheer scale – it’s health directly affects the well being of companies on this side of the pond. A one-way heuristic that may well be about to be reversed at least temporarily.
With Obamaland now inevitably looking at austerity measures similar to the other nations with unsustainably high budget deficits, the fact the new UK coalition government has already embarked on an emergency cost-cutting budget will perhaps be useful in analysing future US index movements.
The effects in the UK of increases in tax – VAT – and the cutbacks to runaway public spending will be watched keenly by the market to see it’s effect on consumer demand. Sentiment shows a nervous market – the FTSE has dropped 200pts since the budget accouncement last week. But it will be a few month before the effects begin to filter through from the consumer frontline.
This will still be a long time before any related measures are taken on the other side of the Atlantic – commentators and government alike seen the UK cutbacks as ‘unnecessary’ despite their own dire financial situation – so it seems natural that the first port of call for insight on likely equity movements will be towards the FTSE back in the UK.