Is a recession coming? What’s next for the pound? Your questions answered

It’s been a tumultuous summer for markets. As people return from their summer vacations with the rest of the year in mind, the Markets Today team asked our Instagram followers what they wanted to know. Questions ranged from assessing the outlook for the economy and currencies, to stock trading trends, to approaching a company’s earnings report. Here — in a lightly edited transcript — are our answers.

What are the risks of a recession?

Ironically, Bloomberg tracks the collective view of economists on this very issue, so we can see what the current view is and how it has changed over time. In the U.K., economists now put the risk of a recession over the next year at 30%, up from 60% at the start of the year. In the U.S., the figure is also 30%, up from 50% in January.

Overall, economists now seem less concerned about a recession than they were earlier this year, reflecting growing confidence that central banks can achieve a soft landing — an abandonment of high interest rates before they crash their economies. With interest-rate cuts already underway in the U.K. and seen as imminent in the U.S., there is reason to believe the worst may be behind us, at least for now.

Still, as the market crash earlier this month (partly fueled by somewhat weak U.S. jobs data) showed, there is still significant uncertainty surrounding growth in markets.

What is the outlook for currencies?
For much of the early part of 2024, currency volatility was stagnant as investors believed central banks would act largely in unison when it came to interest rate cuts. This translated into a first quarter that saw the euro hit its third-narrowest range since its inception and sterling its second-lowest since the 1970s. Since then, while we’ve seen a bit more action, policymakers have moved at different paces. The pound has seen some particularly strong moves, rising more than 7% against the dollar from its April low to last month’s high.

Most analysts expect the pound to pull back slightly by the end of the year, with the median estimate in a Bloomberg survey calling for a drop to $1.30 from around $1.31 currently. The euro, meanwhile, has largely held its ground against the dollar.

The caveat to all this is that, as we saw in August, markets and central bankers are very data-driven right now. So if we see reports suggesting the BOE, Fed, or ECB need to be more cautious or more aggressive in their easing cycles, big swings are still possible.

Will interest rate cuts mean stock prices fall?
Generally speaking, lower interest rates aren’t a bad thing for stocks. They make it cheaper for companies to borrow money, allowing them to invest more in future growth while reducing the associated debt that can weigh on their finances.

Still, it really depends on which sectors the stocks are in. If you look at what’s happening in the UK as talk of cutting interest rates intensifies, you’ll see the main beneficiaries.

Among those that are particularly sensitive to interest rates are property investment firms, which benefit from cheaper loans when interest rates fall. Homebuilders are also getting a boost, as lower borrowing costs are good for their financing — and cheaper loans for buyers can have a knock-on effect of increasing demand for homes. On the other hand, banks can make more money on the money they lend to customers when interest rates are higher.

The picture is further complicated by the fact that some of the UK’s largest companies receive a significant proportion of their revenue from overseas, so exchange rates also come into play there, as does the macroeconomic environment elsewhere. Some companies also have to buy inputs and incur other costs in markets outside the UK, meaning investors will look beyond the domestic rates environment when valuing a company. Mining and oil and gas companies are still among the largest players in the FTSE 100 and tend to have the majority of their operations abroad.

Do markets change under the influence of trends such as fashion?
Sometimes recurring trends sweep markets and can mask individual stock moves to some extent. Looking at the last two days, for example, we see what is called a “risk-averse” trading environment, where assets that are most susceptible to macroeconomic forces are being shunned in favor of defensive plays.

In the case of stocks, these are things like utilities and consumer stocks, which are seen as having revenue streams that are more insulated from things like economic data and oil prices. In the opposite scenario, oil and gas stocks tend to outperform financials and other assets that are seen as tied to the broader macroeconomic environment when markets have a higher appetite for risk.

While these big, broad trends come and go over time, we also see more specific thematic trends, often tied to a new concept or technology. Much of the volatility we’ve seen recently has been tied to heightened expectations around AI and what it can deliver — and now questions are being asked about whether all of this is as promising as the money behind it suggests. We may also see trends emerging in markets tied to global events, such as in stocks that have benefited from lockdowns during the pandemic.

Often, thematic trends can become quite speculative—with lots of short-term buying, high valuations, and expectations—and risk turning into a “bubble,” which of course tends to burst at some point. One famous example of this is the dot-com boom of the early 2000s.

What are the most important parts of a company’s financial statements?
One of the first things I learned when I first started covering stocks and trying to decipher financial statements is that investors are interested in what’s going to happen, not what’s already happened. That means that often the most closely watched part of any company’s announcement is the outlook, guidance, or whatever the company calls it, looking ahead to the rest of the fiscal year or the new fiscal year.

That’s not to say that the actual numbers for the reporting period aren’t useful. Earnings, revenue, sales growth, cash, dividends — all of these elements will grab attention. More specifically, all of these elements and clues will be compared to expectations set before the event. And all of them will be placed in the context of what the stock was doing before the results were released.

This means that a company could deliver what at first glance might look like pretty good results, but if expectations were even better than what was reported, the stock could fall. On the other hand, the report could look really negative, but the stock could rise if things aren’t as bad as feared.

So what happened to Nvidia’s earnings?
Nvidia’s results are a clear example of the important role expectations play in stock markets.

Its quarterly revenue and profit more than doubled, beating analysts’ expectations. It’s also buying back another $50 billion in stock. The problem is that it doesn’t quite qualify as the kind of profit explosion in the eyes of investors that has fueled the company’s explosive growth over the past few years.

And that means any negatives are magnified. The pace of share buybacks is slightly slower. There are problems with the anticipated new chip. The outlook he presented is not as bullish as expected. All of this ends up being more attention than the results, which, while good, are not as spectacular as expected.

Markets, especially in the UK and Europe, are largely ignoring it today, but Nvidia isn’t. It’s down about 5% in pre-market trading. If it does, it will wipe about $150 billion off its market capitalization, almost as much as HSBC.

It’s a good reminder to all stock watchers that even if a company reports a great result, what’s more important for a stock is whether its results are good enough to meet investors’ hopes. And AI hopes are stratospherically high, especially for the poster child of a megatrend.