The trend in the GBP-complex sharply reversed after BoE Governor Carney said the UK is moving closer to a rate hike yesterday.
The unexpected rise in UK’s unemployment rate in May, from 5.5% to 5.6%, sent Cable down to 1.5603 in London. But given that this is merely transitional and heavily weighted to The kneejerk sell-off could be a good opportunity to enter the bull market as the improvement in wages growth – when adjusted for inflation, at the highest pace in seven years - has an influence on the BoE outlook. First, we know that Carney is closely monitoring the progress in wages to determine how fast the slack in the labour market disappears. Second, higher wages are the growth engine for the economic recovery. Third, a healthy recovery is a sine qua non condition for the policy normalisation. Finally, Osbourne is also pushing for higher wages to solidify the UK budget.
The conclusion is that the improvement in wages has become a primary, common goal for fiscal and monetary policies and should outweigh the unexpected deterioration in the unemployment rate.
Looking ahead, higher wages and low inflation is a time bomb for the real estate market in the UK. Even if inflation takes time to pick-up, the BoE may want to be pro-active avoiding an extra overheating in the UK’s house market. For all the reasons stated above, the UK jobs data has potential to further boost the BoE hawks and push the pound higher against EUR and USD. It is just a matter of time before the 0.70p level is breached against the euro.
UK Markets foiled by Carney.
The FTSE 100 is trading flat unable to capitalise on the upside moves witnessed in the past couple of days. The threat of monetary tightening as well as the continual strain from Greek headlines is keeping any real gains in check for now.
The slight beat on GDP expectations for China, remaining bang on the closely watched 7% level for the second quarter, lends a degree of support to UK equities today with Rio Tinto (LONDON:RIO) (+1%) and Anglo American (LONDON:AAL) (+1.5%) amongst the early mining sector gainers. BHP Billiton (LONDON:BLT) (+0.5%) lags slightly as it announces a $2bn impairment on its U.S. shale business, a third write down in as many years.
Burberry Group (LONDON:BRBY); -2%
One of Britain’s flagship brands-abroad, the luxury fashion house is seeing a slowdown in growth as the year goes on. Following 11% growth in Q1, Q2 expansion has slipped to 8%. Underlying the performance reads well, but the worry over a sharp fall in activity in Hong Kong and lacklustre growth on the Chinese mainland will worry investors that other signs of a slowdown in the region are now being exhibited in one of their favoured imports. Shares peaked in the first quarter and have struggled to show sustained resistance on the way down since. Full year performance will be impacted by how the brand deals with volatile currency movements, with the FT highlighting that despite the growth slowdown, at current FX levels full year profit for this year will be ahead of guidance in May.
Vodafone (LONDON:VOD); -1%
Goldman Sachs (NYSE:GS) have downgraded the telecoms giant to neutral, as talks with Liberty Global (NASDAQ:LBTYA) about an asset swap continue. The bank views a base case for Vodafone as 220p without any M&A premium, whilst upside above 280p is unlikely and their current target is 250p, a 6-7% gain from current levels.
With Yellen set to testify later today, we look for the Dow to open 10 points higher.
Greek Parliament votes on a deal agreed with a ‘knife to the neck’
Greek parliament votes today on whether the austerity conditions agreed with the EU on Monday are worth a third bailout deal. PM Tsipras, who said to have agreed with ‘a knife to his neck’ will now face revolt from his party given that the latter EU agreement consists of tougher austerity measures than those rejected by the population on July 5 referendum. The opposition support is critical. We are heading into another politically tense day in Greece.
With its hands apparently tied, the Eurozone’s periphery is witnessing the slow death of democracy in Greece. There are no particular signs of contagion in Eurozone’s sovereign debt market.
The price action in the euro complex is expected to remain choppy with two-sided volatility ahead. The on-week realized volatility against the US dollar tops at 15%. Resistance is eyed at 1.1051 (200 hour MA), before 1.1100 (Fib 50% on Jun 29 – Jul 7 retrace) and 1.1240/78 (Jun 29 and Jun30 top respectively). On the downside, the break of 1.0916 (post-Greek referendum low) should pave the way to 1.0819 (May 27th low).
The positive momentum in DAX futures is losing pace below 11600/11645 monthly highs. The daily upside potential is seen capped at 11750/11800 (Fibonacci 61.8% retracement from April 13th pick) before the concretisation of a Greek deal. Only more clarity should open the gate for a further advance this week and could be the catalyser for an advance to 12000/500 mark.
The correlation between the DAX and the EUR/USD turns neutral from negative as euro and DAX are both subject to the same event risk: Greece. Fundamentally speaking, today’s euro levels are still very favourable for German competitiveness on the international platform. Potential appreciation in euro following a deal should not be an important barrier to DAX futures’ advance.