What’s driving markets? Calmer bond yields set the tone, as UK Retail Sales surge

Global bond markets are calmer this morning, which is helping risk sentiment. Although the US’s ‘Big, Beautiful, Bill’ has spooked the US Treasury markets this week, rising bond yields seemed to pressurize House Republicans to make cuts to spending, including Medicaid. The Budget will now be debated by the Senate, which could be even more of a moderating force, so the cost of this budget could be far less than the current $3 trillion behemoth it currently is.

Asian stocks are higher, European futures are mostly flat, while US futures are also pointing to a slight decline. US stocks were on a roller coaster ride on Thursday: falling sharply, before recovering and then ending the day flat. This is a sign that the recovery rally is on pause, and investors are focused on the bond market for signals about risk sentiment.

UK yields continue to be a dangerous outlier

US Treasury yields are lower across the curve, and there are also lower yields in Europe. However, the market is worried about the US 30-year yield above 5%, while the UK’s yield is above 5.5%. This is a sign that the market remains wary of lending to the UK while the government still does not have control of public spending, even if the decline in the energy price cap is adding downward pressure on short term yields this morning. The bond market has dictated UK fiscal policy before, and it could do so again now that bond markets remain volatile.

UK economic resilience in Retail Sales

UK retail sales were much stronger in April. Sales rose by 1.3%, defying expectations of a 0.1% rise. Core sales, excluding fuel, were also stronger, rising by 1.2% MoM, the annual rate for core sales is now 5%. Sunny weather always sends the Brits to the shops, and hot weather helped to boost sales of food last month.

While this may send some inflationary vibes, we think that retail sales could be lumpy going forward. Although public sector pay rises are obviously having an impact on sales, so too could news flow about tariffs, with UK consumers front-loading purchases in an effort to avoid tariffs and higher prices down the line. Thus, we may not see this level of sales going forward, even though it is likely to give the UK economy a nice boost going into Q2.

Residual concerns boosts the Gold price

The bond market may have stabilized, but that hasn’t had a calming impact on the dollar, which is lower again on Friday against all its G10 counterparts. Added to this, the gold price is bouncing back and is higher by another $35 and is back above $3,300. This suggests that there is residual tension in the market about the US fiscal situation, and investors are still demanding the safety of the yellow metal.

Bitcoin cools, and watch out for tokenization of the marketplace

Bitcoin was in focus on Thursday, after it smashed through the previous record high. It has backed away from record highs early on Friday and is down $600 to $110,400. The crypto powerhouse has had a stunning rally since its low of $76,000 in April, it is higher by more than 40% since then.

News that there would be greater tokenization of assets, which means that stocks and bonds would be tradable on the blockchain, initially caused stocks like Nvidia to rally on Thursday, however, this rally faded, although Nvidia still closed the day higher than the broader market. Tokenization is likely to be the buzzword of the summer, and we expect to see more providers along with a greater variety of assets available on the blockchain, which will diversify away from just crypto.