Europe’s markets have got off to a quiet and slightly softer start today as UK and US markets return from a long weekend.
A decent Asia session had got things off to an initially positive start as we come to the end of May with the Nikkei 225 hitting a one month high on speculation that Japanese PM Shinzo Abe will postpone next years scheduled sales tax hike from 8% to 10% until late 2019, in yet another example of a politician failing to tackle the structural problems afflicting their respective economies.
Mr Abe’s warnings of a global Lehman style slump at the G7 last week appeared to be a case of getting your excuses in early, as he continues to fight a losing battle to kick start a sustained economic recovery in Japan’s faltering economy. He may also hoping that a looser fiscal policy will help in undermining the recent rebound in the Japanese currency, which cut the rug out of the recent easing measures by the Bank of Japan.
On the company front Volkswagen (DE:VOWG_p) shares dropped sharply after reporting that pre-tax profit for Q1 declined nearly 20% year on year, as the fallout from the emissions testing scandal continues to make itself felt. Revenues also fell to €51bn and though profits came in slightly ahead of expectations the shares have slid back having risen over 25% since their February lows.
On the data front German unemployment fell again, coming in at 6.1%, the lowest level since reunification, on the back of another drop in the numbers in May, this time by 11k, following on from a 16k drop in April.
On the flip side of that equation Italian unemployment jumped sharply in April from 11.5% to 11.7%, once again highlighting the intractability of the problems being faced in Europe by divergent economies.
US markets look set to return from their long weekend break on a fairly flat note, in the process bringing to a close a month that started out badly but has seen stocks trade back close to their highest levels this year.
This is despite speculation that the next US rate hike could come as soon as the next couple of months, with most discounting a June move despite Fed chief Janet Yellen becoming the latest in a long line of US policymakers suggesting that a move could come as soon as next month.
While Ms Yellen’s comments were more nuanced than some of her colleagues it has becoming increasingly clear that Fed policymakers want to get investors used to the idea of a move higher in rates.
By and large it does appear to be working given the recent rise in US markets along with a rebound in the US dollar. The danger is likely to come from the pace of any rate moves and while there is a possibility the Fed may be able to get away with a modest 25 basis point rate rise in the next couple of months, if they attempt to do more than that by year end it could well come back to bite them hard.
As things stand there is some evidence that the US economy is slowing, with manufacturing struggling and there is a sense that the US consumer may not be anywhere near as resilient as people think. Granted US home sales showed some nice gains in April but this was set against a backdrop of a fairly dovish Federal Reserve. This tone has changed markedly in the last couple of weeks with some officials talking of 3-4 rate hikes in the next 12 months, which if they come to pass could knock sentiment quite sharply.
Today’s personal income and spending data should give us some indication as to whether US consumers are ready to loosen the purse strings in April, while inflation data should present some clues as to whether price pressures are starting to build up away from food and energy price fluctuations.
The Dow Jones is expected to open 7 points higher at 17,880
The S&P500 is expected to open unchanged at 2,099
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