gilt yields

Bank of Japan stays on hold, UK public finances in focus
By Michael Hewson (Chief Market Analyst at CMC Markets UK)
 
European markets saw a cautious but broadly positive start to the week, despite weakness in basic resources which served to weigh on the FTSE100.
US markets picked up where they left off on Friday with new record highs for the Dow, S&P500 and Nasdaq 100 although we did see a loss of momentum heading into the close, as US yields rebounded off their lows of the day.
 
The tentative nature of yesterday's gains appears to be being driven by a degree of caution ahead of some key risk events over the next couple of weeks, starting today with the latest Bank of Japan policy decision. This is set to be followed by the European Central Bank on Thursday, and then the Fed and Bank of England next week.
 
For most of this month central banks have been keen to reset the policy narrative when it comes to the timing of rate cuts which had markets pricing in the prospect of

Navigating Currency Markets: Chinese Property Developer Reprieve, ARM's IPO, Oil Production Figures, and USD Outlook

Rising Rates and Stock Markets: Finding Comfort in Unconventional Pairings

Michael Hewson Michael Hewson 19.06.2023 09:44
Rising rates and rising stock markets aren't usually a combination that sits comfortably with a lot of investors but that's exactly what we saw last week, with European markets enjoying their best week in over 2 months, while US markets and the S&P500 enjoying its best week since March.     One of the reasons behind this rebound is a belief that Chinese demand may well pick up as the authorities there implement stimulus measures to support their struggling economy.   There is also a belief that despite seeing the Federal Reserve deliver a hawkish pause to its rate hiking cycle and the ECB deliver another 25bps rate hike last week, that we are close to the peak when it comes to rate rises, even though there is a growing acceptance that interest rates aren't coming down any time soon.     We did have one notable outlier from last week and that was the Bank of Japan who left their current policy settings unchanged in the monetary policy equivalent of what could be described as sticking one's fingers in one's ears and shouting loudly, and pretending core inflation isn't already at 40-year highs.   This week, attention turns to the Swiss National Bank, as well as the Bank of England, who are both expected to follow in the ECB's footsteps and hike rates by 25bps.   The UK especially has a big inflation problem, with average wages up by 7.2% for the 3-months to April, the Bank of England, not for the first time, has allowed inflation expectations to get out of control. This was despite many warnings over the last 18-months that they were acting too slowly, even though they were the first central bank to start hiking rates.     We heard over the weekend from former Bank of England governor Mark Carney that this state of affairs wasn't surprising to him, and that Brexit was partly to blame for the UK's high inflation rate and that he was proved correct when he warned of the long-term effects back in 2016.   Aside from the fact that UK inflation is not that much higher than its European peers, Carney's intervention is a helpful reminder of what a poor job he did as Bank of England governor. At the time he warned of an economic apocalypse warning that growth would collapse and unemployment would soar, and yet here we are with a participation rate at near record levels, and an economy that isn't in recession, unlike Germany and the EU, which are.     The reality is that two huge supply shocks have hit the global economy, firstly Covid and then the Russian invasion of Ukraine, and that the UK's reliance on imported energy and lack of gas storage which has served to magnify the shock on the UK economy.   That would have happened with or without Brexit and to pretend otherwise is nonsense on stilts. If anything is to blame it is decades of poor energy policy and economic planning by successive and existing UK governments. UK inflation is also taking longer to come down due to the residual effects of the energy price cap, another misguided, and ultimately costly government policy.   Carney is probably correct about one thing, and that is interest rates are unlikely to come down any time soon, and could stay at current levels for years.   This week is likely to be a big week for the pound, currently at 14-month highs against the US dollar, with markets pricing in the prospect of another 100bps of rate hikes. UK 2-year gilt yields are already above their October peaks and at 15-year highs, although 5- and 10-year yields aren't.     This feels like an overreaction and while many UK mortgage holders are looking at UK rates with trepidation, this comes across as overpriced. It seems highly likely we will get one rate rise this week and perhaps another in August, but beyond another 50bps seems a stretch and would be a surprise.        With some US markets closed for the Juneteenth public holiday, today's European session is likely to be a quiet one, with a modestly negative open after US markets finished the end of a positive week, with their first daily decline in six days.       EUR/USD – pushed up to the 1.0970 area last week having broken above the 50-day SMA at 1.0880. We now look set for a move towards the April highs at the 1.1095 area. Support comes in at the 50-day SMA between the 1.0870/80 area.     GBP/USD – broken above previous highs this year at 1.2680 last week as well as moving above the 1.2760a area which is 61.8% retracement of the 1.4250/1.0344 down move. This puts us on course for a move towards the 1.3000 area. We now have support at 1.2630.      EUR/GBP – broken below the 0.8530/40 area negating the key reversal day last week and opening up the risk of further losses towards the 0.8350 area. Initial support at the 0.8470/80 area. Resistance at 0.8620.     USD/JPY – continues to push higher and on towards the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Support now comes in at 140.20/30      FTSE100 is expected to open 35 points lower at 7,608     DAX is expected to open 92 points lower at 16,265     CAC40 is expected to open 34 points lower at 7,354   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
Navigating Currency Markets: Chinese Property Developer Reprieve, ARM's IPO, Oil Production Figures, and USD Outlook

Rising Rates and Stock Markets: Finding Comfort in Unconventional Pairings - 19.06.2023

Michael Hewson Michael Hewson 19.06.2023 09:44
Rising rates and rising stock markets aren't usually a combination that sits comfortably with a lot of investors but that's exactly what we saw last week, with European markets enjoying their best week in over 2 months, while US markets and the S&P500 enjoying its best week since March.     One of the reasons behind this rebound is a belief that Chinese demand may well pick up as the authorities there implement stimulus measures to support their struggling economy.   There is also a belief that despite seeing the Federal Reserve deliver a hawkish pause to its rate hiking cycle and the ECB deliver another 25bps rate hike last week, that we are close to the peak when it comes to rate rises, even though there is a growing acceptance that interest rates aren't coming down any time soon.     We did have one notable outlier from last week and that was the Bank of Japan who left their current policy settings unchanged in the monetary policy equivalent of what could be described as sticking one's fingers in one's ears and shouting loudly, and pretending core inflation isn't already at 40-year highs.   This week, attention turns to the Swiss National Bank, as well as the Bank of England, who are both expected to follow in the ECB's footsteps and hike rates by 25bps.   The UK especially has a big inflation problem, with average wages up by 7.2% for the 3-months to April, the Bank of England, not for the first time, has allowed inflation expectations to get out of control. This was despite many warnings over the last 18-months that they were acting too slowly, even though they were the first central bank to start hiking rates.     We heard over the weekend from former Bank of England governor Mark Carney that this state of affairs wasn't surprising to him, and that Brexit was partly to blame for the UK's high inflation rate and that he was proved correct when he warned of the long-term effects back in 2016.   Aside from the fact that UK inflation is not that much higher than its European peers, Carney's intervention is a helpful reminder of what a poor job he did as Bank of England governor. At the time he warned of an economic apocalypse warning that growth would collapse and unemployment would soar, and yet here we are with a participation rate at near record levels, and an economy that isn't in recession, unlike Germany and the EU, which are.     The reality is that two huge supply shocks have hit the global economy, firstly Covid and then the Russian invasion of Ukraine, and that the UK's reliance on imported energy and lack of gas storage which has served to magnify the shock on the UK economy.   That would have happened with or without Brexit and to pretend otherwise is nonsense on stilts. If anything is to blame it is decades of poor energy policy and economic planning by successive and existing UK governments. UK inflation is also taking longer to come down due to the residual effects of the energy price cap, another misguided, and ultimately costly government policy.   Carney is probably correct about one thing, and that is interest rates are unlikely to come down any time soon, and could stay at current levels for years.   This week is likely to be a big week for the pound, currently at 14-month highs against the US dollar, with markets pricing in the prospect of another 100bps of rate hikes. UK 2-year gilt yields are already above their October peaks and at 15-year highs, although 5- and 10-year yields aren't.     This feels like an overreaction and while many UK mortgage holders are looking at UK rates with trepidation, this comes across as overpriced. It seems highly likely we will get one rate rise this week and perhaps another in August, but beyond another 50bps seems a stretch and would be a surprise.        With some US markets closed for the Juneteenth public holiday, today's European session is likely to be a quiet one, with a modestly negative open after US markets finished the end of a positive week, with their first daily decline in six days.       EUR/USD – pushed up to the 1.0970 area last week having broken above the 50-day SMA at 1.0880. We now look set for a move towards the April highs at the 1.1095 area. Support comes in at the 50-day SMA between the 1.0870/80 area.     GBP/USD – broken above previous highs this year at 1.2680 last week as well as moving above the 1.2760a area which is 61.8% retracement of the 1.4250/1.0344 down move. This puts us on course for a move towards the 1.3000 area. We now have support at 1.2630.      EUR/GBP – broken below the 0.8530/40 area negating the key reversal day last week and opening up the risk of further losses towards the 0.8350 area. Initial support at the 0.8470/80 area. Resistance at 0.8620.     USD/JPY – continues to push higher and on towards the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Support now comes in at 140.20/30      FTSE100 is expected to open 35 points lower at 7,608     DAX is expected to open 92 points lower at 16,265     CAC40 is expected to open 34 points lower at 7,354   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
Bank of England Faces Dilemma: Will They Raise Rates by 25bps or 50bps?

Bank of England Faces Dilemma: Will They Raise Rates by 25bps or 50bps?

Michael Hewson Michael Hewson 22.06.2023 08:06
Bank of England set to raise rates again, but by how much?      European markets fell for the third consecutive day yesterday, after the IFO in Germany warned that a recession would be sharper than expected in the second half of the year, and UK core inflation unexpectedly jumped to a new 32 year high. US markets also fell for the third day in a row after Fed chairman Jay Powell doubled down on his message from last week to US lawmakers yesterday, that US rates would need to rise further to ensure inflation returns to target.   This weakness in US markets looks set to translate into a lower European open, as we look towards another three central bank rate decisions, from the Swiss National Bank, Norges Bank and the Bank of England all of whom are expected to raise rates by 25bps today. Up until yesterday's CPI number markets were predicting with a high degree of certainty that we would see a 25bps rate hike from the Bank of England later today.   That certainty has now shifted to an even split between a 25bps rate hike to a 50bps rate hike after yesterday's sharp jump in core CPI to 7.1% in May.   As inflation readings go it's a very worrying number and suggests that inflation is likely to take longer to come down than anticipated, and even more worrying price pressure appears to be accelerating, in contrast to its peers in the US and Europe where prices now appear to have plateaued.   This has raised the stakes to the point that the Bank of England might feel compelled to hike rates by 50bps later today, and not 25bps as expected. Such an outcome would be a surprise from the central bank given their cautious nature over the years, however such has been the strong nature of recent criticism, there is a risk that they might overreact, in a sign that they want to get out in front of things. Whatever they do today it's not expected to be a unanimous decision, but the surge in core inflation we've seen in recent months, does make you question what it is that Swati Dhingra and Silvana Tenreyro are seeing that makes them think that the last few meetings were worthy of a no change vote.    In the absence of a press conference to explain their actions a 50bps rate move would be a risky strategy, as it could signal they are panicking. A more measured response would be to hike by 25bps with a commitment to go more aggressively at the next meeting if the data warrants it. The big problem the bank has is that they won't get to see the July inflation numbers, when we could see a big fall in headline CPI, until after they have met in August, putting us into the end of Q3 until we know for certain that inflation is coming down. The resilience in UK core inflation has got many people questioning why it is such an outlier, compared to its peers, however if you look closely enough the reason is probably staring us in the face in the form of UK government policy and the energy price cap, which has kept gas and electricity prices artificially high for consumers.   If you look at the price of fuel at the petrol pump it is back at the levels it was prior to the Russian invasion of Ukraine, due to the slide in oil prices from their peaks of $120 a barrel, with consumers already benefitting from this disposable income uplift into their pockets directly in a lower bill when it comes to refilling the family car.    Natural gas prices have gone the same way, yet these haven't fed back into consumers' pockets in the same way as they have in the US and Europe.   This has forced employers here, in the face of significant labour shortages, to increase wages to attract the staff they need, as well as keep existing staff to fulfil their business functions. We already know that average weekly earnings are trending upwards at 7.6% and in some sectors, we've seen wage growth even higher at between 15% and 25%.    These increased costs for businesses inevitably feed through into higher prices in the cost of delivering their services, and voila you have higher service price inflation which in turn feeds into core prices, in essence creating a price/wage spiral.   It is perhaps a supreme irony that an energy price cap that was designed to protect consumers from rising prices is now acting in a fashion that is making UK inflation a lot stickier, and making the UK's inflation problem a lot worse than it should be.   So, while a lot of people are blaming the Bank of England for the mess the UK is in, we should also direct some of the blame at the energy price cap, a Labour Party idea that was hijacked by the Conservatives and is now acting as moron premium in the UK gilt market.   It is these sorts of poorly thought through political interventions that always have a tendency to come back and bite you in ways you don't expect, and the politicians are at it again, with the Lib Dems calling for a £3bn mortgage protection scheme, another crackpot idea that would push back in the opposite direction and simply make the task of getting inflation under control even more difficult.     On the plus side there are reasons to be optimistic, with the energy price cap set due to be reduced in July, while PPI inflation has also been falling sharply, with the monthly numbers in strongly negative territory, meaning it can only be a matter of time before the year-on-year numbers go the same way.     This trend of weaker PPI suggests that market forecasts of a terminal bank rate of 6% might be overly pessimistic, and that subsequent data will pull gilt yields lower, however we may have to wait another 2 to 3 months for this scenario to play out in the data.   This should still feed into headline CPI by the end of the year, though core prices might prove to be slightly more difficult to pull lower.      EUR/USD – remain on course for the April highs at 1.1095 while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.   GBP/USD – fell back to the 1.2680/90 area yesterday before recovering, having found resistance at the 1.2845/50 area at the end of last week. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510.    EUR/GBP – found support at the 0.8515/20 area and has move up towards the recent highs at 0.8620. A move through 0.8630 could see a move towards 0.8680. While below the 0.8620 area the bias remains for a return to the recent lows.   USD/JPY – currently finding itself rebuffed at the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move. Above 142.50 targets the 145.00 area. Support now comes in at 140.20/30.    FTSE100 is expected to open 45 points lower at 7,514   DAX is expected to open 82 points lower at 15,941   CAC40 is expected to open 34 points lower at 7,227   By Michael Hewson (Chief Market Analyst at CMC Markets UK)
Bank of England Faces Rate Decision: Uncertainty Surrounds Magnitude of Hike

Bank of England Faces Rate Decision: Uncertainty Surrounds Magnitude of Hike

Michael Hewson Michael Hewson 22.06.2023 12:28
Bank of England set to raise rates again, but by how much?    By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets fell for the third consecutive day yesterday, after the IFO in Germany warned that a recession would be sharper than expected in the second half of the year, and UK core inflation unexpectedly jumped to a new 32 year high. US markets also fell for the third day in a row after Fed chairman Jay Powell doubled down on his message from last week to US lawmakers yesterday, that US rates would need to rise further to ensure inflation returns to target.     This weakness in US markets looks set to translate into a lower European open, as we look towards another three central bank rate decisions, from the Swiss National Bank, Norges Bank and the Bank of England all of whom are expected to raise rates by 25bps today. Up until yesterday's CPI number markets were predicting with a high degree of certainty that we would see a 25bps rate hike from the Bank of England later today. That certainty has now shifted to an even split between a 25bps rate hike to a 50bps rate hike after yesterday's sharp jump in core CPI to 7.1% in May.     As inflation readings go it's a very worrying number and suggests that inflation is likely to take longer to come down than anticipated, and even more worrying price pressure appears to be accelerating, in contrast to its peers in the US and Europe where prices now appear to have plateaued. This has raised the stakes to the point that the Bank of England might feel compelled to hike rates by 50bps later today, and not 25bps as expected.     Such an outcome would be a surprise from the central bank given their cautious nature over the years, however such has been the strong nature of recent criticism, there is a risk that they might overreact, in a sign that they want to get out in front of things. Whatever they do today it's not expected to be a unanimous decision, but the surge in core inflation we've seen in recent months, does make you question what it is that Swati Dhingra and Silvana Tenreyro are seeing that makes them think that the last few meetings were worthy of a no change vote.      In the absence of a press conference to explain their actions a 50bps rate move would be a risky strategy, as it could signal they are panicking. A more measured response would be to hike by 25bps with a commitment to go more aggressively at the next meeting if the data warrants it. The big problem the bank has is that they won't get to see the July inflation numbers, when we could see a big fall in headline CPI, until after they have met in August, putting us into the end of Q3 until we know for certain that inflation is coming down.   The resilience in UK core inflation has got many people questioning why it is such an outlier, compared to its peers, however if you look closely enough the reason is probably staring us in the face in the form of UK government policy and the energy price cap, which has kept gas and electricity prices artificially high for consumers. If you look at the price of fuel at the petrol pump it is back at the levels it was prior to the Russian invasion of Ukraine, due to the slide in oil prices from their peaks of $120 a barrel, with consumers already benefitting from this disposable income uplift into their pockets directly in a lower bill when it comes to refilling the family car.  Natural gas prices have gone the same way, yet these haven't fed back into consumers' pockets in the same way as they have in the US and Europe.   This has forced employers here, in the face of significant labour shortages, to increase wages to attract the staff they need, as well as keep existing staff to fulfil their business functions. We already know that average weekly earnings are trending upwards at 7.6% and in some sectors, we've seen wage growth even higher at between 15% and 25%.      These increased costs for businesses inevitably feed through into higher prices in the cost of delivering their services, and voila you have higher service price inflation which in turn feeds into core prices, in essence creating a price/wage spiral. It is perhaps a supreme irony that an energy price cap that was designed to protect consumers from rising prices is now acting in a fashion that is making UK inflation a lot stickier, and making the UK's inflation problem a lot worse than it should be.   So, while a lot of people are blaming the Bank of England for the mess the UK is in, we should also direct some of the blame at the energy price cap, a Labour Party idea that was hijacked by the Conservatives and is now acting as moron premium in the UK gilt market. It is these sorts of poorly thought through political interventions that always have a tendency to come back and bite you in ways you don't expect, and the politicians are at it again, with the Lib Dems calling for a £3bn mortgage protection scheme, another crackpot idea that would push back in the opposite direction and simply make the task of getting inflation under control even more difficult.     On the plus side there are reasons to be optimistic, with the energy price cap set due to be reduced in July, while PPI inflation has also been falling sharply, with the monthly numbers in strongly negative territory, meaning it can only be a matter of time before the year-on-year numbers go the same way.   This trend of weaker PPI suggests that market forecasts of a terminal bank rate of 6% might be overly pessimistic, and that subsequent data will pull gilt yields lower, however we may have to wait another 2 to 3 months for this scenario to play out in the data.     This should still feed into headline CPI by the end of the year, though core prices might prove to be slightly more difficult to pull lower.    EUR/USD – remain on course for the April highs at 1.1095 while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – fell back to the 1.2680/90 area yesterday before recovering, having found resistance at the 1.2845/50 area at the end of last week. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510.      EUR/GBP – found support at the 0.8515/20 area and has move up towards the recent highs at 0.8620. A move through 0.8630 could see a move towards 0.8680. While below the 0.8620 area the bias remains for a return to the recent lows.     USD/JPY – currently finding itself rebuffed at the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move. Above 142.50 targets the 145.00 area. Support now comes in at 140.20/30.      FTSE100 is expected to open 45 points lower at 7,514     DAX is expected to open 82 points lower at 15,941     CAC40 is expected to open 34 points lower at 7,227
Gold Market Sentiment and Analyst Forecasts: Bond Yields and China's Impact

Navigating Central Banks and Inflation: Tightening, Yield Curves, and Market Expectations

ING Economics ING Economics 23.06.2023 11:39
Rates Spark: Whatever it takes, until it breaks The Bank of England showed that central banks will not be shy to tighten more if disinflationary dynamics don't materialize. A reaction function more geared to current data than to being forward looking biases yield curves flatter - until something breaks.   Deeper curve inversions highlight potential costs of tightening too far The initial market reaction to the Bank of England increasing key rates by a larger than anticipated 50bp increment to 5% was revealing. Yield curves twisted flatter, with outright drops in the 10y rate as the more aggressive approach by central banks is seen as coming with an increasing economic cost. Curves staked out new post-March lows although the move lower in long end rates later faded. What sticks is the sense that central banks will remain hawkish and won’t be shy to increase rates further should the lack of disinflationary dynamic warrant it. In any case markets think the BoE has shifted to a more aggressive reaction function, with an even greater focus on current inflation dynamics. After yesterday’s 50bp hike, another 50bp in August is seen as more likely than not. In total, a further 110bp of tightening is discounted in forwards, implying expectations that the BoE will take the terminal rate above 6% before year end. This is a view that our economist does not share, seeing only two more 25bp hikes eventually being realised.      The question remains how far central banks can credibly take the tightening, with record curve inversions pointing to stretched levels. Macro indicators such as, in the US, the Conference Board’s Leading Index are also signalling recession. Today’s release of the June PMI  flash estimates could also serve to highlight the growing discrepancy between the central banks' own optimistic macro outlooks and the softening data indicators, but they alone are unlikely to resolve the disconnect.    More front-loaded tightening seen after the BoE's hawkish surprise   Next week offers key inflation data Sticky core inflation could remain the key theme for next week. Even if there were some positive surprise, central banks have made it clear they want to see a trend for the better in inflation data. By definition that will take a couple of releases at least, but it won’t keep forward-looking markets from extrapolating any incoming data points. That difference can still keep a curve flattening bias in play.   In the US the key release to watch is the PCE inflation data at the end of the week. The headline rate is seen lower, but the consensus is looking for both the monthly and yearly core readings to remain unchanged, at 0.4% and 4.7%, respectively, after their upward surprise last month. Stickier core inflation could still validate the Fed’s hawkish case, but with a lower headline that might not be enough for markets to endorse the two more hikes implied by the FOMC's latest "dot plot". In the eurozone markets will be closely following first the individual country inflation data before we get the June CPI estimate for the block on Friday. The market eyes a decrease in the headline rate to 5.6% year on year, while our economists have pointed out that within core, services inflation continues to see some upside risk for the months ahead. Ahead of the these key releases central banks will have plenty of opportunity to lay out their current reaction function, with the ECB’s central banking forum in Sintra kicking off on Monday. The main event will be a policy panel attended by the ECB’s Lagarde, Fed’s Powell, BoE’s Bailey and BoJ’s Ueda.   Gilt yields higher, but Treasuries and Bunds still appear capped for now   Today's events and market views Through all the key central bank meetings of the last few weeks, it is notable that the trading ranges for longer-dated EUR and USD rates have held, resulting in the overall curve flattening move. The diffrence to the UK is that that, inflation-wise, things have been moving in the right direction, even if only slowly. Still, it does look as if there is a stronger will to test the upside and we would not exclude that 10Y UST yields hit 4% again before going lower.   For now, an eventful week will be capped off by the release of the June PMI flash estimates.  In the eurozone last month brought a pretty bleak report as the PMI indicated that services experienced slower growth and manufacturing experienced a sharper contraction. Consensus is looking for services growth to slow further, but the manufacturing slowdown to at least stabilise. Last month’s main upside was around fading inflation expectations. Central banks will want to rely on the actual inflation readings, where the UK has shown that in the current circumstances, one reading disappointing to the upside can make quite a difference. The next key inflation releases out of the US and eurozone are what markets can look forward to towards the end of next week.  
US Retail Sales Mixed, UK Inflation Expected to Ease: Impact on GBP/USD and Monetary Policy

Key Economic Updates: UK and US GDP Figures, Core PCE Deflator, and UK Mortgage Approvals

Michael Hewson Michael Hewson 26.06.2023 07:53
UK Q1 GDP final – 30/06 – in the recent interim Q1 GDP numbers the UK economy managed to avoid a contraction after posting Q1 growth of 0.1%, although it was a little touch and go after a disappointing economic performance in March, which saw a monthly contraction of -0.3% which acted as a drag on Q1's 0.1% expansion.   The reason for the poor performance in March was due to various public sector strike action from healthcare and transport, which weighed heavily on the services sector which saw a contraction of -0.5%. The performance would have been worse but for a significant rebound in construction and manufacturing activity which saw strong rebounds of 0.7%. There is a risk that this modest expansion could get revised away, however recent PMI numbers have shown that, despite rising costs, business is holding up, even if economic confidence remains quite fragile. US Q1 GDP final – 29/06 – the first iteration of US Q1 GDP was disappointing with the economy growing by 1.1%, slowing by more than expected, largely due to a bigger than expected scaling down in inventories. This was subsequently revised up to 1.3%, helped by an upward revision to 3.8%, which was a strong rebound from 1% in Q4, as US consumers went out on a New Year splurge. Slightly more concerning was rise in core PCE over the quarter, from 4.4% in Q4 to 5%. We're not expecting to see much of a change in this week's revisions, although headline might get revised to 1.4%, while most of the attention will be on the core PCE number for evidence of any downward revisions, as more data gets added to the wider numbers. US Core PCE Deflator (May) – 30/06 – this week's core PCE deflator numbers could go some way to pouring further cold water on the Fed's claims that it has another 2 rate rises in its locker. A couple of weeks ago the US central bank warned that while it had taken the decision to implement rate increase pause, it still felt that inflation risk was skewed to the upside and that the market should prepare itself for a terminal rate of 5.6%. This was a little unexpected given the current direction of travel we've been seeing over the past few months, when it comes to prices. When the Core PCE Deflator numbers were released in April headline inflation did edge up from 4.6% to 4.7%, while the deflator itself pushed up to 4.4% from 4.2%, begging the question as to whether central bank officials are right to be cautious. This week's core PCE numbers, along with personal spending numbers ought to offer markets an additional insight as to whether these concerns are valid, or whether the Fed's recent hawkishness is justified.   UK Mortgage Approvals (May) - 29/06 - since the start of the year we've seen a modest improvement in mortgage approvals, after they hit a low of 39.6k back in January. The slowdown towards the end of last year was due to the sharp rise in interest which weighed on demand for property as well as house prices. As energy prices have come down, along with lower rates, demand for mortgages picked up again with March approvals rising to 51.5k, before slipping back to 48.7k in April. This could well be as good as it gets for a while with the renewed increase in gilt yields, we've seen in the past few weeks, prompting weaker demand for new borrowing. Similarly net consumer credit has also started to improve after similar weakness. Although inflationary pressures are starting to subside, the increase in wages is prompting concern over higher rates and higher mortgage costs in the coming months. Given current levels of uncertainty consumer credit numbers could well increase further, while net lending could see a further decline after April lending fell by -£1.4bn, the weakest number since July 2021.   By Michael Hewson (Chief Market Analyst at CMC Markets UK)
Services PMIs and Fed Minutes: Analyzing Market Focus and Central Bank Strategy

Unraveling the Perils: Exploring Stress and Amplification Risks in UK Pension Funds and Investment Portfolios

ING Economics ING Economics 29.06.2023 13:42
In 2022, the period of stress in UK pension funds started with concerns about the UK fiscal outlook prompting a sharp rise in gilt yields, which led to large mark-to-market losses on the fixed-income portfolio of defined-benefit pension funds. This caused margin and collateral calls that pension and liability-driven investment funds had to meet through the sale of gilt securities, pushing gilt prices even lower. The Bank of England was forced to announce temporary and targeted purchases of long-dated gilts and index-linked gilts to stabilise prices.   The goal of this intervention was to allow liability-driven investment funds to rebalance without amplifying the initial shock. This episodeshows that, even though pension funds and insurance companies are not really exposed to maturity transformation risks (like other NBFIs are), they are still at risk of being caught in a death spiral. Furthermore, other NBFIs would be exposed to the risk of investors withdrawing which would further amplify this risk. Additionally, exposure to a concentrated portfolio of assets combined with liquidity shocks can amplify stress events. For example, redemptions can force investment funds to sell assets, depressing prices and leading to further sales by other market participants with similar portfolio holdings, thus, amplifying the initial shock. Unfortunately, over the last two years, investment fund portfolios have become increasingly similar, increasing the threat of correlated liquidity shocks. This is even more important as NBFIs have also grown in size.   Increasing similarity in NBFI portfolios' asset class since 2020 IMF asset class similarity index reached 0.3 points in 2022
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Inflation Numbers Take Center Stage as Quarter Comes to a Close

Michael Hewson Michael Hewson 30.06.2023 09:50
Inflation numbers a key focus as we round off the quarter       European markets continued their recent patchy performance, as we come to the end of the week, month, quarter, and half year, with the FTSE100 sliding back while the likes of the DAX and CAC40 were slightly more resilient, after German inflation came in slightly higher than expected in June.   US markets were slightly more positive, but even here the Nasdaq 100 struggled after a sizeable upward revision to Q1 GDP to 2%, and better than expected weekly jobless claims numbers sent US yields sharply higher to their highest levels since March, while the US dollar also hit a 2-week high.   The surprising resilience of US economic data this week has made it an absolute certainty that we will see another rate increase in July, but also raised the possibility that we might see another 2 more rate increases after that.   The resilience of the labour market, along with the fact that core inflation remains sticky also means that it makes the Federal Reserve's job of timing another pause much more difficult to time. Today's core PCE Deflator and personal spending numbers for May could go some way to making that job somewhat easier.   Core PCE Deflator is forecast to remain unchanged at 4.7%, while personal spending is expected to slow from 0.8% to 0.2%. While the Federal Reserve isn't the only central bank facing a sticky inflation problem, there is evidence that it is having slightly more success in dealing with it, unlike the European Central Bank which is seeing much more elevated levels of headline and core prices. Yesterday, we saw CPI in Germany edge higher from 6.3% in May to 6.8%, while in Spain core prices rose more than expected by 5.9%, even as headline CPI fell below 2% for the first time in over 2 years.   Today's French CPI numbers are expected to show similar slowdowns on the headline rate, from 5.1% to 4.6%, but it is on the core measure that the ECB is increasingly focussing its attention. Today's EU flash CPI for June is forecast to see a fall to 5.6% from 6.1%, however core prices are expected to edge back up to 5.5% after dropping to 5.3% in May. Compounding the ECB's and other central banks dilemma when it comes to raising rates is that PPI price pressures are falling like a stone and have been since the start of the year, in Germany and Italy. In April French PPI plunged -5.1% on a monthly basis, even as the year-on-year rate slowed to 7% from 12.8%.   If this trend continues today then it might suggest that a wave of deflation is heading our way and could hit sometime towards the end of the year, however while core prices remain so resilient central banks are faced with the problem of having to look in two different directions, while at the same time managing a soft landing. The Bank of England has an even bigger problem in getting inflation back to target, although it really only has itself to blame for that, having consistently ignored regular warnings over the past 18 months that it was behind the curve. The risk now is over tightening just as prices start to fall sharply.   Today's Q1 GDP numbers are set to confirm that the UK economy managed to avoid a contraction after posting Q1 growth of 0.1%, although it was a little touch and go after a disappointing economic performance in March, which saw a monthly contraction of -0.3% which acted as a drag on the quarter overall.   The reason for the poor performance in March was due to various public sector strike action from healthcare and transport, which weighed heavily on the services sector which saw a contraction of -0.5%. The performance would have been worse but for a significant rebound in construction and manufacturing activity which saw strong rebounds of 0.7%.   There is a risk that this modest expansion could get revised away this morning, however recent PMI numbers have shown that, despite rising costs, business is holding up, even if economic confidence remains quite fragile.     One thing we do know is that with the recent increase in gilt yields is that the second half of this year is likely to be even more challenging than the first half, and that the UK will do well to avoid a recession over the next two quarters.       EUR/USD – slid back towards and below the 50-day SMA, with a break below the 1.0850 area, potentially opening up a move towards 1.0780. Still have resistance just above the 1.1000 area.     GBP/USD – continues to come under pressure as we slip towards the 50-day SMA at 1.2540. If this holds, the bias remains for a move back to the 1.3000 area. Currently have resistance at 1.2770.       EUR/GBP – currently being capped by resistance at the 50-day SMA at 0.8673, which is the next resistance area. Behind that we have 0.8720. Support comes in at the 0.8580 area.     USD/JPY – briefly pushed above 145.00 with the November highs of 147.50 beyond that.  Support remains at the 142.50 area, which was the 61.8% retracement of the 151.95/127.20 down move. A fall below this support area could see a deeper fall towards 140.20/30.    FTSE100 is expected to open 18 points higher at 7,489     DAX is expected to open 12 points higher at 15,958   CAC40 is expected to open 8 points higher at 7,320      
Unlocking the Future: Key UK Wage Data and September BoE Rate Hike Prospects

UK Banks Pass Stress Test: Resilient in Face of Rising Interest Rates

Michael Hewson Michael Hewson 12.07.2023 09:29
UK banks pass stress test results By Michael Hewson (Chief Market Analyst at CMC Markets UK)   The latest set of stress tests by the Bank of England have shown that the UK banking sector is resilient and well able to handle the problems caused by the sudden rise in interest rates that is currently putting the UK economy and households under increasing pressure financial stress.   The criteria were adjusted higher from similar tests in 2019 and are based in the following.   It is assumed UK monetary policy tightens, with Bank Rate assumed to rise from under 1% to 6%, in the first three quarters of the scenario, above the 4% used in previous tests. UK GDP contracts by 5.0%, and unemployment more than doubles to 8.5%, while residential property prices fall by 31%.   The Bank of England went on to say that all 8 UK banks, would continue to be resilient in such a scenario and well positioned to support households and business, even if financial conditions worsened and rates were to go higher from here.    We've seen significant weakness so far this year particularly from the likes of Lloyds Banking Group and NatWest Group, who are particularly exposed to domestic factors after paring back their investment banking divisions so today's results are likely to be good news for these two especially, and should offer a respite to recent weakness in their share price.   The Bank of England went on to say that the portion of UK households with high debt ratios was likely to rise, and that while they are borrowing more, arrears are currently low. While this may be true this figure on arrears is likely to rise due to the lag effects of monetary policy.   Most mortgage borrowers are on fixed rate mortgages with about 4.5m set to see a rise in repayments on loans that were set more than two years ago. When these come up for refinancing any new rate could see a typical payment rise by £220 a month.   To give an indication of how much 2-year rates have risen, 12 months ago UK 2-year gilt yields were at 1.68%. They are now just below 5.5%. Similarly, 5-year gilt yields have risen from 1.55% to 4.9%. When these deals roll-off and refinance, the size of mortgage payers monthly repayment will soar, which means homeowners may well have to consider various options including switching to interest-only repayments if rates continue to remain high.   The rise in rates is already hitting the buy to let sector with the Bank of England saying that landlords are already starting to sell, which is positive in terms of new supply, however it also means that the rental sector will get tighter as supply comes off the market.   For businesses corporate insolvencies are increasing but are still low.
EUR/USD Faces Resistance at 1.0774 Amid Inflation and Stagflation Concerns

Bank of England Raises Rates by 25bps, Downgrades Growth Forecast, and Keeps Options Open for September

Michael Hewson Michael Hewson 03.08.2023 15:01
Bank of England hikes by 25bps, keeps options open for September By Michael Hewson (Chief Market Analyst at CMC Markets UK)     As expected, the Bank of England raised rates by 25bps to a new 15-year high of 5.25%. This was the baseline assumption given an expectation that we could see further sharp falls in the CPI headline rate in just under 2 weeks' time when we get July CPI numbers, and the lower energy price cap kicks in. There was a 3-way split on the voting with Catherine Mann and Jonathan Haskell voting for a 50bps move, while external MPC member Swati Dhingra maintained her no change stance. The bank also downgraded its expectation for GDP growth for this year to 0.5% from 0.75%. They also downgraded their end of year inflation forecast to below 5%. The pound had already been trading lower in the leadup to the decision and has remained weak as markets price in the prospect that the terminal rate could be lower. This has softened below 5.7%. New MPC member Megan Greene, who replaced dove Silvana Tenreyro adopted a more hawkish position, going with the majority of a 25bps move.     It was also noteworthy that the bank said that rates would need to stay sufficiently restrictive for longer to be able to return inflation to its 2% target, which reading between the lines suggests that rates could be close to their peak. Deputy Governor Ben Broadbent more or less admitted this with his comments that UK policy was restrictive already, and that UK rates are now likely above the neutral rate. Time will tell, but with another 2 CPI reports to come before the September meeting there is a chance that today's hike could well have been the final one of this cycle. UK gilt yields appear to be pricing that prospect already with 2-year yields below 4.9% and down 10bps on the day.     Today's decision by the central bank has prompted a modest rebound in housing and banking stocks off the lows of the day, as traders take the view that the Bank of England is close to calling a pause on further rate hikes. There are some important caveats to a possible pause, with the governor warning that services price inflation has been much more persistent, but with the long and variable lags that monetary policy operates in, the bank needs to be careful about pushing its luck when it comes to further rate hikes, given the fragile nature of the UK economy as well as the housing market. The central bank needs to look more carefully at PPI in terms of the likely direction of headline CPI where we have already seen negative readings in both output and input prices.  
Detailed Analysis of GBP/USD 5-Minute Chart

Market Update: UK Bond Yields Surge, Pound's Rebound, and Retail Sales Outlook

Ed Moya Ed Moya 18.08.2023 10:07
UK 10-year government bond yield surges to a 15-year high US 10-year real yields approach 14-year high Dollar also lower on rebounding yen and yuan The British pound is still rallying from the latest inflation that suggests sticky core inflation will keep the BOE in tightening mode.  With the global bond market selloff being the dominant theme on Wall Street, traders are noticing Gilt yields are standing out.  With FX traders pricing in three more rate hikes by the BOE, it seems that could be the trigger to allow the pound to continue its rebound. Today’s the UK benchmark 10-year bond yield rose 7.7 bps to 4.716%, the highest levels since August 2008.  If we see a further vicious cycle here with Gilt yields, this will suggest BOE rate hike wagers are not cooling.       The GBP/USD daily chart is displaying a Dragonfly doji pattern has identified a bullish reversal that is currently respecting the 50-day SMA.  Price action is also tentatively breaking above the downward sloping trendline that has been in place since mid-July.  If bullishness remains intact, further upside could target the  1.2825 level, followed by the 1.2920 region.  The psychological 1.30 level could remain an elusive target as expectations remain for the US economy to outperform most advanced economies.       Looking Ahead: The UK July retail sales report will show spending declined, impacted by the unseasonable wet weather.  If the mortgage crisis is hitting the economy more harder than expected, we will see that reflected in this report.  Any better-than-expected spending figures could send the pound surging higher.  An-line or worse-than-expected report might trigger some profit-taking from the pound bulls    
Europe's Economic Concerns Weigh as Higher Rates Keep US Markets Cautious

Europe's Economic Concerns Weigh as Higher Rates Keep US Markets Cautious

Michael Hewson Michael Hewson 08.09.2023 12:15
Economy concerns weigh on Europe, as higher rates keep US markets on the back foot By Michael Hewson (Chief Market Analyst at CMC Markets UK)     Yesterday was another mixed bag for European markets, with the DAX closing lower for the 5th day in a row, while still closing well off the lows of the day in another choppy session.  The FTSE100, on the other hand, managed to break a 3-day losing streak, helped by a slightly weaker pound. US markets had a slightly more negative tone to them with the Nasdaq 100 closing lower for the 4th day in a row, with weakness in the Apple share price acting as the main lag on the index, while weekly jobless claims fell to their lowest levels since February.       The overall mood amongst investors does appear to be becoming gloomier, however despite recent price moves we're still within the price ranges we've been in over the past 6 months. With some key central bank meetings looming in the next 2 weeks we might find the catalyst that breaks us out of these choppy ranges. It's been another strong week for the US dollar, set for an eight successive weekly gain, and its highest level in over 6 months as it recovers back to the levels it was just prior to the March regional banking crisis.     One of the main reasons why the US dollar is doing so well is largely down to the performance of the US economy relative to its peers. Recent economic data has shown that the economy remains resilient, so much so that there is a feeling that the Federal Reserve might be able to get away with one more rate hike before year end, probably in November.       The same cannot be said anywhere else with weakness in China, Europe and the UK holding back any prospect of further rate hikes against a backdrop of a deteriorating economic outlook, This change in sentiment has seen the pound and the euro slide back, with the euro slipping below 1.0700 for the first time since June, along with the pound which has slipped below 1.2500. The economic data seen this week, especially from Germany and the rest of the euro area has been extremely disappointing, from some dreadful factory orders data for July, to a sharp downgrade to EU Q2 GDP from 0.3% to 0.1%, which meant that since Q3 of last year the euro area has barely grown at all.     It would take a brave central bank to hike rates further when economic activity is collapsing in one the biggest economies in Europe.   The weakness in the pound has been much more notable as traders pare bets on the likelihood of the Bank of England hiking rates by as much as expected over the coming weeks and months. Judging by recent comments from the likes Governor Bailey earlier this week, as well as deputy governor Broadbent and chief economist Huw Pill at the end of August, there is a sense the market is being softened up for a rate pause later this month, with the narrative likely to be that rates are likely to stay at current levels until 2025 at the very least.     This in turn has seen gilt yields slide across the board, as future rate hike bets get priced out, and investors turn their attention to which central bank might have to cut rates first, with opinion split between the ECB, or the Bank of England.   On the data front it's set to be fairly quiet day, with little way of data on the docket, as we look towards a modestly cautious, but positive European open.   EUR/USD – slipped below the 1.0700 area yesterday, with the May lows at 1.0635 the next key support. Resistance comes in at the 1.0760/70 and the August lows.     GBP/USD – closing in on the 200-day SMA at the 1.2410 area. Below 1.2390 argues for a move towards the 1.2300 area. Only a move back above the 1.2630/40 area, stabilises and argues for a return to the highs last week at 1.2750/60.         EUR/GBP – squeezed back to the 0.8600 area breaking above the 50-day SMA in the process. The 100-day SMA and 0.8620/30 area is also a key resistance. Support lies back at the lows this week at 0.8520.     USD/JPY – had 3 attempts at the 147.80/90 area this week and failed. A break above 148.00 targets the 150.00 area. Only a move below last week's low at 144.50 targets a move back towards 142.00.     FTSE100 is expected to open 7 points lower at 7,434     DAX is expected to open 12 points higher at 15,730     CAC40 is expected to open 5 points higher at 7,201  
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Trading Carefully: Bank of England Keeps Rates at 5.25% Amid Inflation Concerns

Michael Hewson Michael Hewson 02.11.2023 15:15
Bank of England keeps rates on hold at 5.25% By Michael Hewson (Chief Market Analyst at CMC Markets UK)   The Bank of England left rates unchanged at 5.25% which was as expected however anyone who thought there might be a dovish tilt to the decision would have been disappointed with 6 holds and 3 votes for a 25bps rate hike, from Catherine Mann, Megan Greene, and Jonathan Haskel   The central bank also revised its inflation forecast for 2024 higher by 75bps to 3.25%, while nudging the forecast for 2023 down by 25bps to 4.75%. The growth forecasts were disappointing with 2023 left unchanged at 0.5%, while 2024 was downgraded to 0% from 0.5%.   On the inflation forecast it looks like good news for the government in that we are on course for inflation to halve by the end of the year, although it won't be because of anything the politicians have done but merely a consequence of the natural evolution of slowing prices and a slowing economy.   Despite the bleak outlook it was made clear that interest rates were likely to remain higher for longer and that there was no consideration given to rate cuts. Policy would need to remain restrictive suggesting that the MPCbelieves that inflation is the bigger enemy for the moment, and rate cuts would run counter to that outcome as they would weaken sterling.   Governor Bailey was at pains to point out that services inflation remained high and that while wage growth was higher, the MPC believed it was below the 7.8% average in the most recent ONS numbers, trending at around 7%. That said inflation risks remained skewed to the upside, with the bank saying they expect annual pay settlement growth to slow to between 6% to 6.5%. The bigger challenge won't be getting inflation down, but will be in returning it to the 2% target, given that the neutral rate could be closer to 3%.   The pound edged higher against the US dollar, while UK 10-year gilt yields slid to 3-week lows on the back of today's decision with the next focus expected to be on the October inflation numbers, which are a week before the Autumn Statement. It is becoming ever clearer that the Bank of England is done when it comes to further rate hikes, and that the next move is likely to be a cut, although when that happens is anyone's guess.
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Hunt's Autumn Statement: Tax Cuts, Political Maneuvers, and Economic Stability in the Spotlight

Ipek Ozkardeskaya Ipek Ozkardeskaya 22.11.2023 14:57
Hunt in the spotlight  British Chancellor of Exchequer Jeremy Hunt will make his Autumn Statement today and he will do his best to try to please British voters by announcing tax cuts amid slowing inflation, try to make the Tories – who lost a lot of support over the past year-and-so and fell around 20 points behind Labour in the latest polls - look good again, while pursuing a hard-won economic and financial stability after the Liz Truss mini-budget crisis, and keep the country's finances together to avoid another Truss-style bond meltdown.   Happily, for him, the Gilt yields have been falling along with other major economies' bond yields since the October peak. The British 10-year yield tested the 4% level to the downside last Friday. Households are happy to see inflation slow, Rishi Sunak is living up – with a bit of luck – to his promise to halve inflation by year-end, and investors think that the Bank of England (BoE) is done hiking the interest rates. The BoE is also expected to start cutting its rates by May next year - to which the BoE Governor Bailey replies saying that if the market conditions loosen too fast, they may have to raise interest rates again. But that's a detail. Cable advanced to 1.2560 yesterday on the back of a broadly softer US dollar. A too generous Autumn Statement – in terms of pleasing voters – could revive the inflation expectations for the UK hence tame the BoE doves. The latter could trigger a selloff in gilts, push yields higher and help sterling extend its gains against the greenback and pave the way for a further advance to the 1.27 level.   Yet, Cable's upside potential also depends on the dollar's downside potential. The US dollar – which came under a decent bearish pressure since the beginning of the month – is near the oversold territory. And the selloff in the dollar could soon bottom out given the Fed's cautious tone faced with the significant decline in the US long-term bond yields.   Elsewhere the EURUSD sees resistance above a major Fibonacci resistance, near the 1.0955 mark, gold is testing the $2000 per ounce this morning as investors chose safety into the long Thanksgiving holiday in the US while US crude sees resistance at the 200-DMA and Bitcoin is down from recent highs on news that Binance CEO was pleaded guilty as his company prioritized growth over compliance and violated anti-money laundering and unlicensed money transmitting to finance terrorists, cyber criminals and child abusers. The Binance verdict will hardly impact the recent appetite in Bitcoin, which is expected to get a boost thanks to potential spot ETF approvals.   
Bank of Japan Holds Steady, UK Public Finances in Focus: Market Analysis

Bank of Japan Holds Steady, UK Public Finances in Focus: Market Analysis

Michael Hewson Michael Hewson 25.01.2024 12:31
Bank of Japan stays on hold, UK public finances in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw a cautious but broadly positive start to the week, despite weakness in basic resources which served to weigh on the FTSE100. US markets picked up where they left off on Friday with new record highs for the Dow, S&P500 and Nasdaq 100 although we did see a loss of momentum heading into the close, as US yields rebounded off their lows of the day.   The tentative nature of yesterday's gains appears to be being driven by a degree of caution ahead of some key risk events over the next couple of weeks, starting today with the latest Bank of Japan policy decision. This is set to be followed by the European Central Bank on Thursday, and then the Fed and Bank of England next week.   For most of this month central banks have been keen to reset the policy narrative when it comes to the timing of rate cuts which had markets pricing in the prospect of an early move. While US markets have managed to shrug off the prospect of a delay to possible rate cuts, markets in Europe have struggled with the concept probably due to the weakness of the underlying economy relative to how the US economy has been performing. There is a sense that the ECB is over prioritising the battle against inflation which is coming down rapidly and not seeing the damage that is being done to the wider economy by keeping rates higher than they need to be.   Today's Bank of Japan decision didn't offer up any surprises with the central bank keeping monetary policy unchanged against a backdrop that has seen market expectations of rate cuts from other central banks increase markedly since the last Fed meeting. This shift in expectations has helped to ease some of the pressure on the BoJ to look at tightening policy itself to slow the decline of its own currency. The bank also cut its inflation forecast for this year from 2.8% to 2.4%, while nudging its 2025 forecast slightly higher to 1.8%.   Asia markets have seen a more upbeat session on reports that Chinese authorities are looking at a package of stimulus measures to help stabilise the stock market, which could come as soon as next week. Despite this more positive tone European markets look set to open only modestly firmer, with the only economic data of note due today being the latest public finance data from the UK for December.  As far as UK government borrowing is concerned rising interest costs at the beginning of Q4 served to exert upward pressure on the headline numbers, pushing borrowing up to £16bn in October, the second highest October number since 1993. Since those October peaks, gilt yields have declined sharply, along with headline inflation, helping to ease borrowing costs in the mortgage market. This weakness has also come as a welcome relief to the Chancellor of the Exchequer, after UK 10-year yields fell to a low of 3.44%, down from a peak of 4.73% in October. These lower interest costs are likely to see December borrowing slow to £14.1bn, while January could see a surplus as end of year tax payments boost the numbers.     EUR/USD – currently has support at the 200-day SMA at 1.0840. A break below here and the 1.0800 level targets the 1.0720 area. Currently capped at the 50-day SMA with main resistance up at 1.1000.  GBP/USD – remains resilient with support just above the 50-day SMA and 1.2590 area. We need to get above 1.2800 to maintain upside momentum. Also have support at the 200-day SMA at 1.2550. EUR/GBP – continues to find support at the 0.8540/50 level which has held over the last 2-months. A fall through here could see further falls towards the 0.8520 area. We still have resistance at the 0.8620/25 area and the highs last week. USD/JPY – has retreated modestly from the 148.50 area but remains on course for the 150.00 level. Pullbacks likely to find support at the 146.25 level cloud support as well as the 50-day SMA. FTSE100 is expected to open 15 points higher at 7,502 DAX is expected to open unchanged at 16,683 CAC40 is expected to open 7 points higher at 7,420

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