UK and Europe
European markets gave up early gains and turned lower in afternoon trading, with volatility most visible in bank and oil stocks. The late weakness in Europe tracked a weaker start on Wall Street after strong inflation data raised the odds of a US rate hike next month.
Well-received corporate results helped support the FTSE 100 on Tuesday, though shares came off their highs on lacklustre economic data whilst oil pulled back from its highest in seven months.
Telecom and housing stocks were top performers on the UK benchmark after Vodafone (LON:VOD), Taylor Wimpey (LON:TW) and Land Securities (LON:LAND) exceeded earnings expectations.
There is some concern that UK house price inflation is slowing in 2016, but housebuilders' earnings continue to show 2015 was a great year. Taylor Wimpey shares gained over 5% after it announced a special payout on top of an increase to its ordinary dividend.
Vodafone shares rose after the mobile phone operator's “Spring Project” to invest in its network infrastructure helped generate full-year underlying earnings growth.
US
US stocks were lower in early trading after shares of Home Depot (NYSE:HD) dropped despite earnings coming ahead of expectations, and strong inflation data that could put pressure on the Fed to hike rates faster than markets are currently pricing.
Shares of Home Depot got dragged down with weakness in the overall retail sector after a string of disappointing results from the likes of Macy’s and Kohl’s. The price drop came despite Home Depot reporting earnings that suggest it is one of the few department stores American consumers are still keen on.
Home Depot is well positioned by a stable US housing market and its large ticket items which are harder to post and less susceptible to online competition from Amazon.
FX
The US dollar was mostly weaker on Tuesday despite mostly strong US economic data amid higher oil prices and apprehension ahead of the release of FOMC minutes on Wednesday.
US inflation, housing starts and industrial production data all came in ahead of expectations. US consumer prices rose at 0.4% in April, the fastest monthly rise in three years, taking prices 1.1% higher y/y. Core prices, excluding food and energy rose 0.2% m/m and 2.1% y/y.
The British pound gained against the US dollar and the euro after a telephone poll on the EU referendum showed a substantial lead for the ‘Remain’ campaign.
Sterling came off its highs following data showing a surprise slowdown in UK inflation. UK CPI growth fell to 0.3% y/y against expectations of an unchanged print of 0.5%. Core inflation dropped to 1.2% from 1.5%.
Big price falls in meat and second-hand cars appeared to trump gains in tobacco, education and insurance.
The rise in sterling in the face of weaker UK inflation is a sign that markets are correcting what was an initial overreaction to the consequences of a Brexit.
The Australian dollar gained after the RBA minutes turned out to be less dovish than expected, with some members reluctant to cut rates at the May meeting.
Commodities
Oil prices touched fresh seven-month highs but remained mostly unchanged ahead of API weekly inventories data and another expected drop in US production.
The price of gold was volatile as markets contended with the meaning of a sudden sharp sell-off on Monday and news that Chinese bank ICBC is buying a large precious metals vault from Barclays, cementing its place at the table in London’s bullion market.
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