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Sunak’s Budget in focus, Europe poised for positive start

European stock markets outperformed yesterday as traders took their cues from the stable bond market. 

Yields have pulled back from last week’s high so that acted as a green light for traders to snap up relatively cheap stocks on this side of the Atlantic. The FTSE 100 posted the largest gain of the European bunch as mining stocks gave the British index a solid foundation.

Tech stocks soured the sentiment on Wall Street. The NASDAQ 100 dropped over 1.6%, which in turn dragged the S&P 500 0.8% lower. It appears that tech companies have fallen out of favour with investors possibly because the post Covid-19 era is on the horizon, but then again, those stocks have enjoyed a very impressive run.

Lael Brainard, of the Federal Reserve, said there are signs of economic improvement but we need to be patient. The Fed is far from achieving its economic goals. The central banker also said that inflation is still low but expectations have moved closer to 2%.       

UK chancellor Rishi Sunak will be the centre of attention today as he delivers the Budget. The cost of locking down the economy in a bid to control the coronavirus has come at a colossal cost, as government borrowing is predicted to exceed £300 billion this fiscal year. Even though the UK is successfully fighting the virus on the vaccine front – more than 30% of the population have been vaccinated – massive fiscal support is still required.

There are roughly 4.7 million workers on the furlough scheme, which is due to end in late April but there is speculation it will be extended into the summer – which should coincide with the last of the restrictions being removed, if everything goes according to plan. Last night it was confirmed it will be extended until September.

Business rates will be in focus too. Industries like leisure, hospitality and aviation were given some much needed help by the year-long relief on business rates, but extra help is needed. It would not come as a surprise if those sectors saw further relief seeing as activity levels are unlikely to return to normal until the summer. Airlines, pub chains, hotel groups, leisure groups, event companies and transport firms have arguably been the hardest hit by the health crisis, so they might be in for special treatment as they won’t be out of the woods for a long time.    

As a reaction to the pandemic, VAT was slashed from 20% to 5% but that is due to come to an end later this month. Mr Sunak could well maintain a low rate for longer as a way of encouraging spending, so hospitality stocks could be in for a lift.   

Housebuilders traded higher this week on account of chatter the government will announce a 95% mortgage scheme, which they will guarantee. In a bid to encourage buying, stamp duty on properties worth up to £500,000 was cancelled. The incentive is due to expire at the end of this month but the holiday might be pushed back into the summer.

Eye-watering amounts of money have been thrown at the economy to fend off a total collapse but Mr Sunak could risk sending the country into a downward spiral if he removes the support generous mechanisms too early. 

The Caixin survey of Chinese services for February was 51.5 – the slowest rate of expansion in 10 months. Economists were expecting 51.6, the previous reading was 52. It suggests that China’s rebound from the health emergency is cooling. Australia’s recovery is going well as the economy grew by 3.1% in the fourth quarter, which was a slight dip from the 3.3% growth registered in the previous quarterly update. Stocks in Asia are showing solid gains, European markets are set for a higher open.         

Between 8.15am (UK time) and 9.30am (UK time), the largest economies of Europe will post their latest services reports. The updates from Spain, Italy, France, Germany and the UK will be revealed, and the consensus estimate is 43, 46, 43.6, 45.9 and 49.7 respectively. With the exception of the German report, economists are expecting an increase in activity on the month. The UK’s update will be of particular interest, seeing as the January reading was 39.5 so anything in the 49.7 region would equate to a large rebound in activity. Keep in mind the services sector equates to roughly 70% of UK output so a sharp upturn in activity would bode well for the country.

Italian GDP for the fourth quarter is predicted to be -2% on a quarterly basis. In the third quarter, the economy expanded by 16% so a negative reading would represent a massive swing to the downside. Details will be published at 9am (UK time). 

In light of the fact there has been increasing talk about inflation, today’s eurozone PPI update will be of more importance. Economists are expecting the January update to be -0.4%, up from -1.1% in December. A large rise in prices at the factory level could put upward pressure on CPI so the costs are likely to be passed on to the consumer down the line. The PPI announcement will be posted at 10am (UK time).  

The US ADP employment report at 1.15pm (UK time) is expected to show that 200,000 jobs were added last month, which would be an increase on the 174,000 added in January. At the back end of last year, the US government implemented a $900 billion spending programme in a bid to help the economy. The retail sales update for January was more than 5%, so citizens were clearly spending their stimulus cheques, but it is probably too soon to see any significant influence on labour market.

At 2.45pm (UK time) the services PMI report will be announced and the forecast is 58.9. The January report was 58.3. Shortly afterwards, the ISM non-manufacturing will be revealed and economists are anticipating a slight improvement on the month to 60.0. The finer details of the report will be closely watched because earlier in the week, the new orders, the employment and the prices-paid metrics of the manufacturing report all showed increases on the month. In fact, the prices-paid metric jumped to its highest level since 2008. As mentioned above, inflation has been a hot topic recently so traders will be looking for further signs of inflationary pressure.

The EIA report will be posted at 3.30pm (UK time). US oil and gasoline inventories are predicted to fall by 928,000 barrels and 2.3 million barrels respectively. Oil fell yesterday as there are growing concerns that OPEC+ will look to raise output from April.      

EUR/USD – while it holds below the 50-day moving average at 1.2144, 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 1.3724, 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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