UK markets look set to surge on the open as early results appear to show that the opinion polls were way off, with the Conservative party set to come up just shy of a majority, confounding expectations that they were tied with Labour in the opinion polls. While the final results aren’t yet in it is slowly becoming apparent that the Labour Party and Liberal Democrats have come up well short of their expectations. Given the contents of the Labour Party manifesto this early equity market and sterling surge is likely to be more relief that none of these measures will now come to pass. The pound had a difficult day yesterday, without losing too much ground but surged on last night’s early exit poll putting the Tories on 316 seats, still short of an overall majority. Today's UK economic data will still be a salutary reminder that for all of the optimism about the UK's recent economic recovery, significant imbalances still remain with the latest March trade balance numbers set to show a trade deficit of -£2.4bn, a slight improvement on February's -£2.8bn. Just under month ago the latest Chinese March trade data sent shockwaves around the markets after imports and exports slid sharply. Not only did exports slide 15%, missing expectations of a 10% gain by a large margin, but imports also came in lower, dropping 12.7% outside expectations of a 10% slide, and it was these numbers that set the tone for the remainder of April, which no doubt prompted the latest easing measures from the People’s Bank of China. Today’s April numbers were expected to show an improvement but they disappointed as well, exports sliding 16.2%, casting doubt on the global recovery story, but imports also slid again, this time by 6.4%, raising further questions about the internal Chinese recovery story. What these weak figures do suggest though is that we can probably expect further easing measures from the Chinese authorities in the coming months, unless things start to pick up quickly. European equity and bond markets saw another rollercoaster session yesterday, as German bunds hit a yield of 0.78% at one stage, not bad for an asset that was yielding 0.05% a fortnight ago. While yesterday’s selloff didn’t last long, it dominated the morning session before paring losses after oil prices appeared to top out and fall back sharply. Despite yesterday’s rebound the risk remains that European equity markets continue to remain vulnerable to further losses in the short to medium term, given the continuing uncertainty surrounding Greece, as well as economic data that remains patchy as best, and a euro that continues to threaten to squeeze higher, on widening interest rate differentials in its favour. The resultant bounce back in bond markets also appeared to put a floor under equity markets as US markets finished the day higher, while yields on US treasuries also fell back, after hitting their highest levels this year Events in Greece continue to show no signs of convergence between the Syriza government and EU creditors. The Greek government continues to remain steadfast on its red lines on labour and pension reform ahead of next Monday’s Eurogroup meeting and Tuesday’s €750m IMF payment. Optimism of some accord does appear to be rising if yesterday’s gains in Greek bonds and stock market was anything to go by, but given how often we’ve knocked on this door, it pays to be realistic about the prospects for progress. While investors in the UK will no doubt be focussed on events here in London there is also the added complication of the latest US employment report for April, which could go some way to gate crashing events today. Today’s numbers are even more important in the context of the recent slowdown seen in the US economy in the first quarter of this year, which has put back rate hike expectations in to the second half of this year and in the process sent the US dollar tumbling. The March payrolls numbers rocked the markets, coming in as they did at 126k, well below market expectations. Given this week’s weak April ADP payrolls numbers and downward revisions to previous months for the whole of this year, not only will there be significant market focus on the headline number, which is expected to come in at 225k, but also on any revisions to previous months. Any further weakness here could well spook US dollar longs further, as well as pushing out hike expectations even further. The unemployment rate is expected to edge lower from 5.5% to 5.4%, but we need to see that in the context of any sort of move in the participation rate, which currently sits at a 35 year low of 62.7%. Average hourly earnings are expected to show a rise to 2.3% from 2.1%, which could be an indication of building inflationary pressures, which appeared to show up in this week’s unit labour cost data. EURUSD – yesterday we saw a high just shy of 1.1400 as we look to close in on the 1.1500 area. The resultant pullback has seen us hold above the 100 day MA at 1.1240. The 1.1200 area is now likely to act as a key support area for further gains. GBPUSD – the pound struggled to make progress yesterday, but surged towards 1.5500 late last night on the exit poll news, and could well push on further. The 100 day MA at 1.5145 is now way behind us with the 200 day MA being the next target. EURGBP – yesterday’s move to 0.7485 has prompted a minor pullback, and the break below the 0.7320 lows of earlier this week, has seen us drop back towards the 0.7220 area, with support also at 0.7180. USDJPY – the failure to overcome the 120.70 level has seen the US dollar slide back but it looks currently range bound with strong support just above the March lows at 118.30, while at the same time the rebounds keep getting shallower. We need to see a break above 120.70 to mitigate the downside risk of a move towards 116.50. CMC Markets is an execution only service provider. 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Markets set to digest UK vote and US payrolls
02:00, 08 maj 2015