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S&P500 record close to prompt higher Europe open, ahead of UK CPI

After spending a week obsessing about the damage a direct hit from hurricane Irma could do to Florida, coming so soon after hurricane Harvey, US markets roared back yesterday with the S&P500 having its best day since April and closing at a record high, as last week’s worst case scenario failed to materialise over the weekend.

For most of last week estimates of at least $200bn of damage had been doing the rounds as the category 5 hurricane built up speed on its way up from Cuba. Fortunately the storm started to lose speed in the Everglades and by the time it swept down the western side of the Florida coast, striking a glancing blow to Miami in the process, the worst case damage estimates of last week started to get dialled back from some of the more apocalyptic estimates, as the winds slowly dropped to tropical storm levels.

The damage from the wind and the flooding is still likely to be considerable, however it is likely to in the region of a quarter of the worst estimates and may even be less than that.

Nonetheless the lost output and reduced economic activity as a result of these recent storms, as we look ahead to the next few weeks, has also prompted the expectation that the Federal Reserve won’t be raising rates again for a while, and this is also helping boost stock markets.

The S&P500 was also boosted by a strong rebound in Apple’s share price ahead of today’s eagerly anticipated iPhone 8 launch.

European equity markets also enjoyed a decent tailwind, after being weighed down at the end of last week by concerns that North Korea might decide to send another message of defiance to the rest of the world during its National Day celebrations, with another bomb test. While the weekend event passed uneventfully that’s not to say that we won’t get further reminders from the North Korean regime, after the UN agreed a raft of new sanctions on the errant regime. These new sanctions, with the approval of China and Russia, while watered down from their original form could well prompt a further response from the North Koreans in the coming days.

In any case the dialling down of these two factors helped prompting a strong rebound in risk appetite with the insurance sector also having a good day after several days of heavy losses.

After peaking at 2.9% in May the last two months have seen UK inflationary pressures diminish somewhat, but there is a risk that we could see an uptick in the August CPI numbers to 2.8%, largely as a result of last year’s decision by the Bank of England to cut rates to 0.25%, and embark on further QE, which prompted further sterling weakness into the back end of 2016, a self-inflicted wound if ever there was one.

An increase in petrol prices at the pump could prompt a slight uptick in the monthly number to 0.6% from 0.2%, but it still seems likely that we’ve seen the highs in inflationary pressure this year, barring a surprise. The steady decline in input prices since the beginning of the year, from 20% in January to 6.5% in July also suggests inflationary pressure is on the decline, though we could also see a bit of an August uptick here too with expectations of an increase to 7.3%.

The retail price index is also expected to tick up 3.8% from 3.6%, however while an uptick in inflationary pressure wouldn’t be welcome, if we also get an improvement on last month’s wages data in tomorrow’s numbers, then that could well add fuel to external MPC member Michael Saunders calls to raise rates.

It could also shift the dial on the prospect of Chief economist Andrew Haldane joining him and fellow hawk Ian McCafferty, given the former’s recent remarks when he suggested he would consider a rate rise if wage growth started to gain traction.

EURUSD – yesterday’s break below the 1.1980 area could well signal that we’ve seen a short term peak around the 1.2090 level, with a break below the 1.1910 level opening up the prospect of a move towards 1.1820. For now the larger resistance remains at the 1.2170 level which is the 50% retracement of the 1.3995/1.0340 down move.

GBPUSD – the pound appears to have found some resistance at the 1.3225 level for now, which could prompt a drift back towards the 1.3130 level. A fall back through 1.3120 could well open up a move towards the 1.2980 area in the short term.

EURGBP – continues to drift lower towards the 0.9040 area, with a break potentially opening up a test of the 0.8980 area. The 0.9220/30 level remains the key resistance on the top side while we also have trend line resistance at the 0.9170 level.

USDJPY – yesterday’s strong rebound back through the 108.50 level suggests we could well be heading back to the 111.00 area in a classic bear trap which saw the break below 108.20 quickly reversed.

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