Records tumbled one after the other yesterday as equity markets across the world went on a tear in the wake of US President Donald Trump’s pledge to spend up to $1trn on rebuilding the infrastructure of the United States, with the FTSE100 and FTSE 250 both making an closing at new record highs, as the reflation trade took another leg higher.
US markets also surged with the Dow opening above 21,000 and the S&P500 also hitting new record highs above 2,400, as markets posted their best one day gain of 2017.
With senior Fed officials talking up the prospect of a US rate rise just prior to Mr Trump’s speech, markets rode a wave of optimism that an improving global economic outlook, combined with increased spending will boost inflation, which in turn will boost returns for construction and manufacturing companies, while higher rates will boost financials.
The timing of recent interventions by a number of Fed officials was also curious in their determination to boost market expectations of a move this month to such an extent that it will be extremely difficult to row back from.
As a reminder the probability of a move this month was at 36% just over a week ago, and in the space of that time we’ve surged to over 80%, primarily as a result of the intervention of New York Fed President William Dudley, who is closely allied to Fed chief Janet Yellen, who is due to speak tomorrow.
If the Fed had wanted to keep its options open, a move back to around 60% would have been sufficient, just to give themselves optionality, but in raising expectations to such an extent in such a short space of time, to not act now would deal a serious blow to their credibility, and also prompt quite a sharp market reaction.
In any case the rise of the US dollar helped push the pound back to five week lows, though a slightly weaker manufacturing report didn’t help, as investors worried about a slowdown in the UK economy.
Today’s construction PMI numbers for February are expected to stay unchanged from the sharp drop to 52.2 seen in January. Of all the sectors since the Brexit vote construction has underperformed relative to manufacturing and services despite all the talk of the need to build more houses.
One thing that has been notable over the past twelve months, not just here in the UK but also across the globe has been the rebound in inflationary pressures, with sharp increases in prices being seen in China, Europe, and the US as well as here in the UK.
While a weak pound has amplified the inflationary effect here in the UK a weak euro has done the same thing across Europe, and the effect has been notable in the context of sharply rising prices in Germany, which saw preliminary CPI for February hit 2.2% yesterday, above the ECB’s 2% inflation target.
Today’s EU flash CPI numbers for February could well heap further pressure on ECB President Mario Draghi ahead of next week’s ECB rate meeting to dial back on the stimulus and raise the prospect that a tapering to bond buying may be required before the year is out. He ruled that out at the last meeting but with German real yields approaching -3%, the pressure to act will likely take on a political dimension the closer to the German elections we get. Expectations are for CPI to rise to 2% from 1.8%
EURUSD – the euro continues to chop around despite last week’s new one month low at 1.0493.The bias still remains for a move lower towards the lows this year near 1.0340. We need to recover back through the 1.0680 area to retarget the highs at 1.0800.
GBPUSD – the pound fell through support at 1.2380 yesterday and as such brings the 1.2250 area into play. A fall through here reopens the previous lows at 1.1980/1.2000. The pound needs to recover back through the 1.2380 level to stabilise.
EURGBP – the unexpected break above the 0.8570 area opens up the risk of further gains towards 0.8650 on a break above the 0.8600 level. Support now comes in at 0.8520.
USDJPY – having failed to push below the 111.60 area and the recovery through 113.20 we look set for a retest of the previous peaks at the 115.00 area.
FTSE100 is expected to open 8 points lower at 7,375
DAX is expected to open 4 points lower at 12,063
CAC40 is expected to open unchanged lower at 4,960
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