In a week that saw the FTSE 100 close at its best levels in over a year, optimism over this week’s economic reopening of outdoor pubs, shops, gyms and hairdressers appears to be being tempered by concerns over next month’s local and regional elections, and in particular how well the (Scottish National Party) SNP might do in the context of whether they get a mandate from Scottish voters to hold another independence referendum.
These concerns seem somewhat premature and overstated at this point in time, however these undercurrents could well act as a bit of a handbrake on any upside for UK stocks, as well as the pound, over the next few weeks.
For now, European stocks look set to open lower despite the strong finish in the US, as markets in Asia came under pressure ahead of a key week for Chinese data, against concern that Chinese officials are now looking at cracking down on some of the frothier parts of the Chinese economy, as they look to take measures to rein in leverage and increasing regulation. A $2.8bn fine by Chinese regulators on Alibaba saw their shares surprisingly rise, however its counterparts in the sector, the likes of Tencent, JD.com and Baidu, have slid back.
The higher finish in the US occurred despite a sharp move higher in US and Chinese factory gate prices in March, with both the Dow Jones and S&P 500 closing at record highs, though it is also noteworthy that the Nasdaq and Russell 2000 have lagged behind their larger counterparts.
Fed chair Jay Powell acknowledged over the weekend that the US economy was at an important economic inflection point, with the recent actions by policymakers on both the fiscal and monetary policy side set to act as a decent catalyst for a sustained period of job creation, and strong economic growth, as the vaccination programme gets stepped up further.
While we saw record highs from the likes of the two US big-cap indexes, we also saw the DAX, FTSE 250 and Stoxx 600 hit new record levels, on optimism that after what has been a shaky response from EU countries' vaccination programmes that they will eventually catch up on their slow start. This certainly seems a valid conclusion to arrive at, with the recovery in the euro last week a consequence of that, but it also ignores a number of political headwinds, namely who will replace Angela Merkel as German chancellor in the upcoming election this autumn, and whether Europe can get its pandemic recovery fund signed off and distributed by the end of the year.
Aside from that most of the market’s attention this week is expected to be on the start of US banks' earnings season, as well as the latest CPI and retail sales numbers for March. The Federal Reserve has thus far been able to do a decent job in managing market expectations about the timing of any measures to rein back on monetary policy support, even in the face of a March jobs report which beat even the most optimistic expectations.
These expectations could well face a further examination in the coming days, as we look to tomorrow’s CPI inflation data, which is expected to show a big rise from February. This shouldn’t be altogether surprising given comparisons to March last year when the US went into lockdown, however Thursday’s retail sales numbers could be a different story, if we get a big number fuelled by further stimulus payments to US households.
EUR/USD – strong move higher last week but need to see a move above 1.1930 to signal some form of base is in and a move towards 1.2000. A move below 1.1860 signals a retest of 1.1780.
GBP/USD – finding support at the 1.3670 area, however a break below 1.3650 could well signal further losses towards 1.3550. We need to get back above 1.3830 to retarget the 1.3920 area.
EUR/GBP – while above the 0.8620 area we could see further gains towards the 0.8730 area. A move below 0.8620and the 0.8600 area retargets 0.8540.
USD/JPY – has held above the 108.70 area for now and while we do there is the possibility of a move back above the 110.00 area to retarget the recent highs at 110.96. Below 108.70 retargets the 108.20 area.