After an initially negative start yesterday, markets in Europe turned around strongly to finish the day higher, as investors slowly get used to the idea that all of this talk about the prospect of rate rises and tapering is merely finessing a timeline, rather than any underlying concerns that the US Federal Reserve is going to be knee-jerk when it comes to withdrawing stimulus and potentially raising rates.
US markets also had a strong session, with the S&P 500 reversing its losses of Thursday and Friday, while US 10-year yields snapped back to 1.492%, having hit a two-month low of 1.3530 earlier in the day.
The US dollar also gave back its Friday gains in the wake of last Friday’s and yesterday’s comments from St Louis Fed president, James Bullard, as John Williams of the New York Fed took a more nuanced view, saying that the economy hasn’t recovered sufficiently for stimulus to be withdrawn, and that the central bank remains “a ways off achieving substantial progress”, reiterating his view that inflation is transitory, as attention turns to today’s testimony to US lawmakers from Fed chief Jerome Powell.
After yesterday’s recovery and strong US finish, markets in Europe look set for a positive start, with markets in Asia having a decent session and the Nikkei 225 recovering a decent proportion of yesterday’s losses.
Having seen the UK economy post its biggest annual post-war deficit of over £300bn in 2020, the new tax year started the same way it finished the last, as April public sector borrowing came in at £31bn, and an 11-month high. With the easing of lockdown, it was still lower than the same month a year ago, when April borrowing hit an eye-watering £47.8bn, but it was still the second biggest April number ever, with the economy still in a partial state of lockdown, though restrictions were starting to get eased.
The number was also lower than many estimates put forward at the Budget in March, helped in some part by various companies returning their furlough money, while the government also spent £3bn less than expected on the furlough scheme. With the claimant count falling further to 6.2% in May, it's likely that we could see further reductions in furlough spending, as more businesses brought back employees as shops, restaurants and hairdressers started to reopen.
As we look to today’s May numbers, it’s likely that we’ll see a further improvement to £24.6bn, which again would be over £20bn lower than the same time a year ago, while tax receipts are also likely to be higher with more businesses open, albeit operating at a lower rate of activity. Many businesses appear to have adapted quite well to the new ways of operating, and while government borrowing is expected to remain high for the next few months, markets still seem fairly relaxed about it, with gilt yields lower than they were a month ago, despite concerns over the rising inflation risk.
EUR/USD – decent rebound off the 1.1850 area, which if sustained could well see a move back to the 200-day MA. The daily candle looks like a key day reversal with a return to the 1.2000 area a distinct possibility. Below 1.1840 suggests a move to the 1.1704 level.
GBP/USD – yesterday’s sharp rebound from the 1.3790 area looks like a key day reversal, suggesting the potential for a rebound to the 1.4000 area initially, as well as the 1.4080 area. A break below 1.3780 suggests the potential for a move back to the March and April lows at 1.3670.
EUR/GBP – currently ranging between support at the 0.8540/50 area and the highs of the last two days at 0.8600. A break below 0.8540/50 opens up the recent lows at 0.8480.
USD/JPY – rebounded off trend line support at 109.70 yesterday, but needs to move above 110.80 to maintain upwards momentum. A move below trend line support now at 109.70 opens a move back towards the 108.60 area on a break below 109.20.