UK recovery stronger than Germany post-Covid

Equity and bond markets continued to be positively correlated. US treasury yields moved steadily higher dragging other bond markets along in their wake.

The increase in the global risk-free rate pressured global equities. The strong dollar put pressure on many emerging markets and small and mid-cap stocks underperformed. A peak in bond yields is a prerequisite for an improvement in equities.

Figures from the Office of National Statistics revealed that the UK bounced back from the Covid-19 pandemic faster than previously expected and was no longer the worst performer in the G7. In the three months to June, gross domestic product was 1.8% above its pre-pandemic levels. Previously the agency estimated that GDP was 0.2% below. The revisions give the UK a similar performance to France and a stronger recovery than Germany.

While there will be short term variances in economies the factors impacting growth are broadly similar for all Western European economies. The US should continue to grow at a higher rate but faces challenges. The public sector deficit is high and the country politically divided. Valuations of US equities remain high by historical standards even after adjusting for the different sectorial composition of US indices.

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