U.K. Stocks Fall After Strong Second Quarter Finish

The U.K. stock market experienced a significant decline on Friday, making it the worst performing among major stock markets in Europe. This drop comes as new data reveals a surprisingly robust finish to the second quarter.

Disappointing Figures

The FTSE 100 UK:UKX saw a midday decrease of more than 1%. The Office for National Statistics unveiled a report stating that the country's GDP grew by 0.5% in June, resulting in a 0.2% increase on a quarterly basis for the second quarter. Economists had initially predicted zero growth during this period.

Implications for Monetary Policy

The yield on the 2-year gilt BX:TMBMKGB-02Y experienced an uptick of 8 basis points, reaching 4.96%. The release of the GDP data has raised speculations about the Bank of England's future course of action. There is a possibility that they may revert to implementing 50 basis point hikes after choosing a quarter-point increase in August. As a result, the pound GBPUSD, +0.49% saw a rise of 0.5% to $1.2737.

Analyst Insights

Jennifer Lee, senior economist at BMO Capital Markets, emphasized the significance of forthcoming data such as next week's CPI and jobs reports. Lee believes that any positive surprises, especially pertaining to earnings, will place pressure on Governor Bailey and others. Based on the economic performance in June and throughout the second quarter, Lee advises against ruling out the Bank's involvement.

Sandra Horsfield, an economist at Investec Securities, acknowledged several one-off factors. Firstly, June had an extra working day due to King Charles III's coronation in May. Additionally, the warm weather during this month positively impacted hospitality, tourism, and construction industries, which are not expected to be repeated in July because of inclement weather. However, Horsfield also noted that the automotive sector experienced a pickup in manufacturing and sales, aided by improvements in supply chains.