Yesterday’s macro calendar struck something of as dissonant chord with investors. A mixed growth picture in the Eurozone and a downward revision to UK growth from the Bank of England all conspired to bring about a choppy day in equity markets and today European markets continue to look rather directionless. The fact that it’s a bank holiday in France and Germany will also likely enfeeble trade volume today.
Rising bond yields, partly due to the resurgence in oil prices are helping to erase appetite for riskier assets. The resultant strength in the pound and the euro is also helping to dampen any buoyancy in equity indices. The With 8 companies going ex-div today, the FTSE 100 was always going to be playing catch up with the price adjustment taking 12.3 points off the index. The utilities and consumer staples sectors are seeing gains but the UK benchmark is still down 0.4%.
While still above the 6900 level, there is an argument that the index will bounce back but any additional weakness, particularly a daily close below the 6810 level would indicate that the 5 month uptrend is being challenged.
A number of companies have reported earnings today.
Amongst them was ITV (LONDON:ITV) (-1.58%) which posted strong results, beating expectations. Total revenue was £665m, up from £585m during the same period last year while online and broadcast revenue saw an increase of 10% to £530m. The share price hit record highs of 274p in mid-April and has seen gains of some 20% year-to-date but is being subjected to some profit taking today. The fact that viewing figures fell 3% in Q1 and that ITV staff are staging a 24 hour strike today is probably not helping to endear shareholders.
Shares in British Land Co Plc (LONDON:BLND), up over 13% year-to-date also posted a record high last month and may well challenge this level over the medium term. The company reported a rise in its’ underlying profit before tax of 5.4% to £313m. EPS rose 4.1% to 30.6p. With property prices surging in London and the South East, the developer’s exposure to this area has certainly paid off. Expectations that this trend will continue under the Tory government should also support investor sentiment towards the stock.
The ‘bad news is good news’ protocol continues to be a driver for US stocks. Yesterday’s weak retail sales have, to some extent, usurped the wariness of climbing bond yields. We are calling the Dow Jones up by 55 points.
Appetite in GBP curbs, but not against the US dollar
As expected, the BoE’s Quarterly Inflation Report has been a disappointment for the BoE-hawks and trimmed the post-election appetite in the pound complex. Governor Carney said the solid improvement in labour market should continue and the spare capacity should be absorbed within the year. The inflation pressures should be back as there are no signs of consumers delaying their spending according to Carney. This means that the recent disinflation is mostly related to lower oil and commodity prices and should not lead to deflation as it has been the case across the Channel. While the ECB’s QE is seen as net positive for the UK’s economy, the productivity is expected to improve modestly over the next year. Therefore, the conclusion of this ‘upbeat’ speech has been a decent downside revision in UK’s growth forecasts from 2.9% to 2.5%.
More interestingly, the BoE made it clear that the fiscal policy will be determinant for the course of the monetary policy and given Cameron’s determination to tighten the belt, the BoE expects to have more time before starting to normalise rates and targets a softer pace of normalisation. Obviously, political promises are one thing, action is another.
This being said, the BoE’s post-election rhetoric perfectly matched our call for a dovish stance. The first BoE rate hike will certainly not happen any time before the first quarter of 2016. While the headwinds in Cable were nothing but a readjustment of the excess post-election optimism, failure to clear support at 200-dma (1.5613) suggests the extension of gains to 1.5915/1.6215 zone (Fibonacci 50% and 61.8% area on July’14-Apr’15 debasement).
EURGBP gives signs of a short-term bullish reversal and potential of a rise to 0.7310 (Fibonacci 50% on Apr 29-May 7 surge). Option bets are mixed at 0.72, while decent vanilla calls wait for activation above 0.7255-0.7290 today.
Finally, the positive shift and steepening on the Gilt curve is nothing but the result of hesitation on the BoE’s forward guidance and the global sell-off in DM bond markets. The short-end of the Gilt curve will certainly be sustained as Cameron’s new government will concentrate on fiscal austerity, while the back-end could lift higher as soon as some BoE members switch back to the hawkish camp. And this could happen as soon as the end of the quarter.
EUR/USD strengthens
Although the recovery in Eurozone sovereign market remains fragile in the very short-run, the attractiveness of long-term core bonds increases. It is just a matter of time before a fresh wave of inflows inundates the long end of core sovereign papers and pulls the 10-year bund yields back towards their 50 day moving average (0.280%). Over the short term, EUR/USD is therefore looking poised for an extension to 1.1500/50, then 1.1808 (Fibonacci 61.8% on May-March drop).