We touched on market sentiment in yesterday’s commentary, alluding to the fact that the VIX has touched near 25 year lows over the past couple of days. This is quite surprising given the geopolitical events taking place with the US/Russian relationship, while the threat of nuclear action by North Korea is very much a real concern. One concern however that was squashed this week was the political concern in Europe, which had cast a dark shadow over markets. This subside in political risk along with the “fear gauge” lows was not enough for markets to gain much traction, and we could well see stocks post their first negative week since early April. Stocks yesterday had a disappointing day, despite further gains in the oil price. This trend continued overnight into Asian trading where markets were mostly lower. The Trump fade may be partially responsible for this mood as the President continues to attract headlines for all the wrong reasons.
Back to economic data where yesterday’s US producer prices showed strong gains in April, which pushed the annual increase up to its largest advance in five years. US jobs also received a boost with weekly unemployment claims lower. With unemployment in the US at 16 year lows and consumer confidence near a 17 year high, the hawks can certainly press for higher rates come June, which would be their third time in just seven months.
In the UK we had a rather dreary event with the BoE keeping interest rates unchanged, while there was no deviations in voting either. Policymakers here were fairly downbeat, indicated that rates were unlikely to rise either until 2019. Carney also warned that consumers were likely to feel the pinch with inflation moving above wage growth, thus impacting retail spending and lending. This is a real concern for the UK as the consumer has been one of the main drivers of the economy in the past couple of years.
On the currency front, GBPUSD is back below 1.29, now looking at targeting last week’s lows at 1.2820. While the dollar also looks to gain back some lost ground against the euro, remaining below 1.09, a move below 1.08 could see further losses towards 1.06.