BE WARY OF PROVISIONAL GDP FIGURES
MARTIN SLANEY
HEAD OF DERIVATIVES, GFT
FRIDAY’S shock drop in UK gross domestic product data – and the ensuing market reactions – have left many traders confounded. How can it be that we have a dramatically worse-than-predicted number and yet the FTSE 100 index appears virtually impervious?
The third quarter GDP data showed that output fell for a sixth consecutive quarter, making it the longest recession on record. Most economists had predicted at least a neutral number, with many expecting growth. How is it possible for investors to shrug off the pessimism and for the FTSE to finish up on the day?
When trading the markets you have to see beyond the headlines. While at first glance this is a disastrous number and a sure-fire sell on the index, the shrewder traders out there will have been wary of this number. It is particularly important to remember that this GDP figure is a first release – just a preliminary estimate and nothing more. These are notoriously unreliable and there will almost certainly be several revisions.
Bearing this in mind, the significance of a number which is marginally negative instead of marginally positive begins to wane. In the same way that we were all wary of those first “green shoots”, the same cautious approach should be adopted if we start to see a few of those shoots turning a more autumnal shade of brown.
Another reason why the FTSE 100 was relatively resistant to the news is its very composition. This is an index which, despite being made up of the 100 largest companies listed on the LSE, is not all that reflective of the UK economy. It is a particularly cosmopolitan index, for which exporting growth and opportunities carry more weight than the domestic situation.
The FTSE 250 index CFD, now tradable with GFT, in theory offers more variety, covering a wider span of sectors than the bank and oil-dominated blue chip index. More on that next week.
There are valuable lessons to be learnt from Friday’s GDP data. Don’t read too much into first estimates; don’t get caught up in the inevitable political and media furore which follows a shock number such as this; and remember exactly what you are trading.