European markets got off to a fairly decent start to the week, helped by the de-escalation on trade between China and the US, though activity was subdued by the Whitsun bank holiday in Germany. The FTSE 100 and FTSE 250 posted new record highs, while the CAC 40 also closed at its highest levels in 10 years.
On the other side of the ledger, markets in Italy continued to get routed with the FTSEMib hitting a six-week low, while 10-year yields hit their highest levels in over a year, as they closed in on the 2017 peaks, just above 2.4%. The proposed appointment of a new novice prime minister, Giuseppe Conte, has raised concerns that he will merely be a pawn, unable to make decisions independently given that the real power will lie with Matteo Salvini, who leads League, and Luigi Di Maio who leads Five Star, both potentially pulling the strings and not always in the same direction.
In Asia, markets were a little bit more subdued despite a strong US finish, as another rise in oil prices raised concerns about demand destruction after the US pledged to implement swingeing sanctions on Venezuela in the wake of the so-called weekend re-election of President Maduro. Coming on top of the US pulling out of the Iran deal, this is helping underpin prices in the oil markets.
The pound had another poor day yesterday, hitting its lowest levels this year against the US dollar on some vague chatter that some Brexit-supporting Conservative MPs might press for a no confidence motion against the prime minister and potentially force an autumn general election, such is the kamikaze nature of UK politics now.
In the space of the last five weeks the pound has slipped from its highest levels since the Brexit referendum to its lowest levels since last December, as a combination of weaker data, a failure to deliver on a rise in interest rates by the Bank of England and a resurgent US dollar have prompted a significant amount of profit-taking.
Part of the reason for the steepness of the recent decline was the sudden change of direction from the optimism of the February inflation report to the pessimism that came about from the recent hit to the construction sector, as well as the cold weather, which brought some parts of the country to a standstill.
This week’s April inflation and retail sales data are likely to be important in the context of whether we get a rate rise next month or have to wait a little bit longer, though retail sales for May could get a big boost from the weekend Royal Wedding and the significant tourism boost. These May numbers come out one week before the June Bank of England rate decision, so a strong number here could seal the deal on a potential June rate rise.
Today’s Treasury Select Committee testimony of Messrs Carney, Ramsden, Saunders and Vlieghe are also likely to be important benchmarks as to policymakers' thinking with respect to the timing of such a move and in particular David Ramsden and Gertjan Vlieghe’s thinking on it.
There won’t be any surprises around Michael Saunders view given he voted to raise rates last month, and Mark Carney’s view tends to change as often as the weather forecast, but Mr Ramsden’s views are likely to be key after that he suggested in a February interview that rates would have to rise more quickly given recent increases in wages. Against that backdrop it was a bit of a surprise that the Bank of England then proceeded to revise their assessment for wages lower for the rest of this year, so his views on why the central bank has become less bullish on wages are likely to be important, as are Mr Vlieghe’s.
On the data front we will be getting the latest public finance numbers for April, which are expected to come in at £7.2bn, while the latest CBI industrial trends survey for May is expected to show a slight moderation from the 4 April reading.
Forex snapshot
EUR/USD – rebounded from support just above the December lows at 1.1710. We could see a rebound back towards the 1.1900 area in the short term, but the risk remains for further losses towards the 1.1600 area. With the 200-day MA now starting to roll over the prospect of further losses looms large, while below 1.2000.
GBP/USD – having slipped below support at the 1.3450 level the lack of any rebound suggests that we could well head lower towards the 1.3300 level. We need to overcome the 1.3620 area to stabilise and argue for a move towards 1.3720.
EUR/GBP – last week’s failure at the 0.8845 level and the 200-day MA at 0.8880 keeps the onus on the risk of a return towards the 0.8690 level, and even the recent lows at 0.8640. Still range trading.
USD/JPY – the prospect of further gains towards the 112.00 area continues to be a possibility while above the 110.00 area and the 200-day MA. Only a move below the 109.70 area undermines and risks a return to the 108.70 area.
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