Setbacks for the populist Five Star movement in Italy, alongside the prospect of a landslide win for new French president Emmanuel Macron’s En Marche party in parliamentary elections, should have provided a decent backdrop for a positive day in European markets yesterday.
But while bond markets reacted well, equity markets slid back sharply as a certain amount of risk-aversion took over. The decline in tech stocks over the past couple of days has been the primary driver of equity market weakness, after a Goldman Sachs note that asked the question “Is FANG mispriced?". This seems a fair question given that these tech behemoths have pretty much driven the entire rally in the Nasdaq and S&P 500 this year. Five companies, namely Facebook, Amazon, Apple, Microsoft and Google parent Alphabet, have added $600bn worth of that value, while Netflix and NVidia have also been caught in the updraft, as the note prompted some profit-taking following parabolic gains over the last two years.
The pound also had a bad day, dragged lower on continuing political uncertainty, and speculation that the new UK government would be hobbled, not only by its lack of a majority, but also by a weakened leader. If Theresa May is to survive as prime minister over the next few days, it's likely to be only because no-one else wants the job. This comes at a time when it's likely to be difficult to get anything other than a so-called soft Brexit deal done without running the risk of a new vote, which the Conservatives might well lose.
While the Conservative party wrestle with their own internal politics, it was also noticeable that the Labour party weren’t able to agree a consistent party line on Brexit either yesterday, reinforcing the difficulties of selling a consensus across both the two main parties.
UK economy in focus
Away from the politics we get to look under the bonnet of the UK economy this week, at a time when there is rising evidence that the UK consumer, having enjoyed a post-Brexit shopping spree, is now scaling back as inflation starts to eat away at average earnings.
Having started this year at 1.8%, CPI inflation hit 2.7% in April and looks set to stay at this level in the latest May numbers, which are due out later this morning. Core prices have also jumped sharply since the beginning of the year, from 1.6% to 2.4% in April, though we are expected to see a slight moderation in the May's numbers to 2.3%.
There could be a silver lining given recent falls in oil prices, which might suggest that we’ve seen a short-term plateau as prices start to fall back. Input prices in the last few months have shown some signs of dropping, and in both the US and the EU, inflation has shown signs of falling back, which would be good news for hard-pressed consumers when wages are currently lagging behind.
EUR/USD – starting to look a little soft having failed to push up to the November highs at 1.1300. Having already seen a pull back to the 1.1170 area, a break below 1.1150 could well see a move back to the 1.1020 area.
GBP/USD – looking a touch heavy and while below the 1.2750 level the risk remains for a back towards the 200 day MA at 1.2580, with potential to fall even lower towards 1.2380. We need to see a recovery back through the 1.2830 area to stabilise and reopen the potential for a move back above 1.2920.
EUR/GBP – currently finding resistance at the 0.8860/70 area but remains on course for a possible move towards the 0.8920 area. We need to hold above the 0.8720 area for this to unfold or run the risk of a move back to the 0.8650 area.
USD/JPY – currently struggling to close above the 200 day MA at 110.60 and while it does so the risk remains for a move back to the 109.10 level seen last week. We need to see a close above the 200 day MA at 110.60 to argue for a retest of the 111.60 level.
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