Morning Report – Wednesday 12 May

Jon Robson, Head of Trading

“The market is currently focussed on inflation. Higher commodity prices could hinder growth and encourage central banks to withdraw monetary stimulus at a faster pace. The markets have finally accepted the Fed will not alter its loose policy stance, keeping the dollar pinned near a 2-1/2-month low versus major peers.”

Main Headlines

Lael Brainard, a Fed governor, has called on the US central bank to be “patient” in pursuing its ultra-loose monetary policy, dismissing inflation worries and highlighting “uneven” improvements in the labour market. The same views were voiced by Federal Reserve presidents in Cleveland, San Francisco, Philadelphia, Atlanta and St. Louis, pushing back against critics who say the Fed’s near-zero interest rates and asset purchases of $120 billion a month are recklessly fanning financial market excess and future inflation.

The U.K. economy gained momentum in March as Britons geared up for the lifting of coronavirus restrictions. Gross domestic product rose a stronger than expected 2.1% following a revised 0.7% increase in February. The economy shrank 1.5% in the first quarter due to a sharp contraction in January, in line with economists’ expectations. The pickup sets the stage for a rapid recovery from the deepest slump in three centuries. A brighter outlook has shifted the debate from the possibility of negative interest rates to the question of when the Bank of England might start to tighten policy.

GBP

Sterling is well supported against most majors this morning. The Queen has set out more than 25 bills forming the legislative backbone of Boris Johnson’s post-pandemic agenda. They are broadly aimed at the “level up opportunities” across the UK, with Johnson claiming that the new legislation would help Britain “build back better”. The Financial Conduct Authority is “formally investigating” Greensill Capital as documents released by a parliamentary committee showed former prime minister David Cameron lobbied for the company 56 separate times last spring.

EUR

The euro is stronger versus most majors overnight. Isabel Schnabel, an executive director at the European Central Bank, has sought to soothe concerns about an expected increase in German inflation above 3 per cent this year, saying such a rise was unlikely to cause a tightening of monetary policy. Meanwhile, negotiations on access for French fishermen to waters around Jersey will continue after the British island postponed new licensing rules and France lifted a ban on vessels from the Channel Islands landing catches at its ports.

USD

The dollar is weaker against most majors in early morning trade. Significant fuel shortages emerged on the US eastern seaboard on Tuesday night as a rush by motorists drained filling stations. Processors are being forced to reduce run rates, cutting crude oil demand, while refiners are booking ships to warehouse growing fuel-product stockpiles. Colonial Pipeline Co. told federal officials it will know by the end of today whether it’s safe to restart gasoline and diesel flows that have been on hold since criminal hackers targeted the company last week.

Markets

Most Asia stocks slid, along with U.S. and European equity futures. Taiwan’s benchmark dropped as much as 8.6% on a tech rout and Covid-19 curbs, with margin calls exacerbating the selloff. An Asia-Pacific gauge was set for its lowest close since January. Nasdaq 100 futures underperformed after dip buyers helped the tech-heavy gauge to close roughly flat overnight. The S&P 500 weakened for a second day. Markets rallied in China and Hong Kong. Treasury yields were steady. Investors are awaiting inflation data and government debt sales in the U.S. — events that could spark market volatility. Consumer-price inflation is set to quicken, with the year-on-year comparison amplified by the shock of Covid-19 shutdowns in 2020.

Main Economic Data/Central Banks/Government (All Times CET)

8:00 a.m.: U.K. 1Q GDP, March industrial production, Trade

8:00 a.m.: Norway 1Q GDP

8:00 a.m.: Germany April CPI

8:45 a.m.: France April CPI

11:00 a.m.: EU Economic Forecasts

11:00 a.m.: Euro-Area March Industrial Output

11:00 a.m.: Italy to sell bills

11:00 a.m.: BOE’s Bailey speaks

12:05 p.m.: ECB’s Centeno speaks

2:30 p.m.: U.S. April CPI

Sotheby’s to accept cryptocurrency for Banksy work

Corporate Events

Earnings include Iberdrola, EDF, Compass, Verbund, Fortum

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