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Equity sentiment soured, Powell in focus

The FTSE 100 was the biggest riser in Europe yesterday as the generous Budget from Rishi Sunak, UK Chancellor of the Exchequer, helped the British market outperform its continental neighbours. 

The government has been extremely supportive of the economy during these testing times but further assistance was announced yesterday.

For the most part, the support came from the rolling over of existing programmes. The furlough scheme was due to expire at the end of next month but it will continue until September, so that is good news for the 4.7 million people on the scheme. VAT was cut for non-essential retail last year as a way of providing some much-needed help to the hospitality and leisure sectors, the lowered rate will remain in effect for an extra six months. If everything goes according to plan, the economy should be restriction-free by late June, so many businesses like cinemas, pubs and restaurants will only be starting to get back on their feet, so the announcements were welcomed. The taxes on beer and spirits will be kept on hold as an added boost to the pub sector. The relief on business rates will stay in place until the end of June.  

The housing market received a boost as it was confirmed the government will guarantee a 95% mortgage scheme for first-time buyers. Also, the stamp duty holiday on properties worth up to £500,000 has been extended for three months as a way to help push through the transactions that are being processed.

Equity markets in Europe saw robust gains during the day. They slid in the afternoon but they managed to end the session in positive territory. A rally in oil, housebuilding and banking stocks helped the FTSE 100. It was a different story in the US, as the S&P 500 dropped by 1.3% due to the move higher in US yields, a repeat of last week. The selling pressure on tech stock continues as the NASDAQ 100 dropped by almost 2.9%. Rising yields could mean higher borrowing costs, so firms that have a lot of debt are likely to feel the pinch. Also, if yields are increasing that might prompt some investors to rotate out of stocks. 

President Biden announced the US will have such a large supply of vaccines, that every adult in the country should be inoculated by the end of May, two months ahead of schedule. The health news is very encouraging but it couldn’t fend off the bearish sentiment.

Equity markets in Asia are incurring large losses, indices in Japan, Hong Kong and Mainland China are down over 2% as the negative mood in the US prompted dealers to dump stocks. European markets are on track to open in the red, following three days of gains.               

A string of service reports were announced yesterday. The Caixin survey of Chinese services cooled to a 10 month low The data from Europe was mixed as the Spanish, Italian and UK services PMI reports showed increases in activity between January and February, while the updates from France and Germany showed dips in output. Britain’s reading was 49.5 and seeing as the January metric was 39.5, it points to a sizeable rise in output. Services make up 70% of the UK’s economic output, so if the industry can rebound in the current lockdown climate, it suggests that it should flourish when restrictions are unwound.

The US ISM non-manufacturing report was broadly disappointing as the headline level for February was 55.3, down from 58.7 in January. The new orders component dropped to 51.9 from 61.8 and the employment reading cooled to 52.7, but the prices paid component rose from 64.2 to 71.8 – the highest reading in over 12 years. It is mildly concerning that demand is clearly dipping while prices are moving higher. Earlier in the week, the prices paid metric of the ISM manufacturing update rose to a level last seen in 2008. Inflation has been a hot topic lately so the update and in light of the prices paid data, it is unlikely to be going away anytime too. While talk of higher inflation remains in circulation, bond yields run the risk of moving higher, which potentially spells trouble for equities.

Last night’s Beige Book was a little beige. Economic activity increased modestly between January and mid-February. Most districts registered a moderate rise in manufacturing activity, while several regions saw wages increase. Raw material costs, like lumber and steel, saw notable increases. Some manufacturers were able to pass on higher power costs to customers, so that adds to the inflation story.         

The EIA report yesterday showed that US oil stockpiles surged by 21.6 million barrels and in stark contrast, gasoline inventories tumbled by 13.6 million barrels. The big freeze in Texas is almost certainly behind the wild swings in stockpiles as refining capacity fell sharply. Traders viewed the fall in gas inventories as an indication that demand is robust, hence why WTI and Brent crude rallied.     

Oil will be in focus again today as an OPEC+ meeting will take place. The energy recently hit a 13 month high as controlled supply levels combined with hopes for a rebound in the global economy pushed up the price. Saudi Arabia’s voluntary production cut of 1 million barrels per day is due to expire at the end of the month, it is believed the Kingdom is keen to keep production curtailed in a bid to support the price, while other countries would like to roll back some of the output cuts as a way of taking advantage of the high price. 

The UK construction PMI report at 9.30am (UK time) is expected to be 51, which would be an improvement on the 49.2 posted in January – the lowest reading in eight months.     

Eurozone retail sales are tipped to swing from 2% in December to -1.1% in January. It is not unusual for there to be a big drop off in sales activity between the two months as Christmas is a very busy shopping period. The details will be posted at 10am (UK time).

The US initial jobless claims reading at 1.30pm (UK time) is predicted to be 750,000, up from 730,000 in the previous update. An increase in the jobless rate is not ideal but it is worth noting the reading in early January was north of 950,000. At the same time, the continuing claims update will be published, the consensus estimate is 4.3 million, down from 4.4 million. Yesterday’s ADP employment report disappointed as it showed that 117,000 jobs were added last month, it undershot the 200,000 forecast. The previous update was 195,000, so it suggests the labour market is cooling.    

Jerome Powell, the head of the Federal Reserve, will be speaking after 5pm (UK time) at an event hosted by the Wall Street Journal. In the past couple of weeks, there have been growing concerns about inflation possibly rising and higher bond yields, but Mr Powell gave off the impression he is not overly worried. The US recovery is going well but the Fed is still a long way from achieving its economic targets so it is not even thinking about tightening policy.

EUR/USD – while it holds below the 50-day moving average at 1.2138, the recent bearish move should continue. A move below 1.1952, might bring 1.1800 into play. A break above 1.2242 should bring 1.2349 into play.

GBP/USD – since late September it has been in an uptrend, it hit a 34 month high last week. If the positive move continues, it should retest 1.4241. A pullback might find support at 1.3745, the 50-day moving average.   

EUR/GBP – has been in a downtrend since mid-December, last week it dropped to an 11 month low, and further losses might target 0.8400. A rally above 0.8730 should put the 0.8800 area on the radar.   

USD/JPY – has been in an uptrend since early January, yesterday it hit a six month high. If the positive move continues it should target the 108.00 area. A pullback from here could find support at 105.48, the 200-day moving average.    

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