China rate cut boosts risk sentiment

Records keep being set and not in a good way. GfK’s Consumer Confidence Index decreased two points to -40 in May, the lowest score since records began in 1974 as inflation hit a 40-year high. Meanwhile retail sales in April bounced back, so it’s not all doom and gloom for the UK, but it’s not exactly feeling very sunny. German producer inflation rose to 33.5% in April, a record high. That is not a misprint – prices up a third in the last year. In March 2022 the index had increased by 30.9% and in January by 25.9%. Hardly a sign of peak inflation, the headache for the ECB gets worse.

China’s decision to cut its five-year loan prime rate, a reference rate for mortgages, helped boost risk sentiment going Friday’s session. The 15bps cut lifted Asian markets and there is a decent follow-through at the start of European trade, with London and Frankfurt both up around 1.5%. US stock markets were far calmer yesterday albeit all the major indices except the small-cap Russell 2000 registered declines. On the S&P 500, Thursday’s low held, which will give some confidence to the bulls who are attempting to call the bottom. Futures point to a higher open today in the US.

The decision by PBOC to cut the loan prime rate underscores the divergence as the US/UK/ECB start to tighten the Chinese are still easing – they’ve not got out the Covid mess anything like as well as us and this creates risks…primarily big spill overs for China as it will be hard to avoid global tightening and corporates with big dollar debts will feel the strain, whilst their banks have a lot of EM exposure in USD too. In January, Chinese president Xi Jinping warned of “serious negative spill overs” if “major economies slam on the brakes or take a U-turn in monetary policies”. This is exactly what’s happening now.

Central bank jawboning today comes from the Bank of England’s chief economist Pill, who stressed that inflation is likely to hit double digits and is more likely to be higher rather than lower than estimated towards the end of the forecast horizon. Still some way to go on tightening, he said this morning. ECB’s Muller meanwhile talking about need to tighten, essentially reiterating what we’ve hearing in recent days that a July hike is on its way – markets price roughly 50% chance of a 50bps hike, up from 44% yesterday.

Cable is an interesting setup as it traverses a series of Fib levels. Momentum ran into resistance at the 61.8% of the big Mar ‘20 to May ‘21 rally, and is now bouncing around the levels from its move higher this week. Currently the 23.6% area has offered support but bulls will need to see a confirmed break north of 1.25 to bring the 1.2640 high into view.

Dollar index broken trend support and now could look to the area just above 102.

Lower bond yields – US 10s well under 3% - plus the weaker dollar are lifting gold prices. Stagflation is positive for gold. 200-day SMA recovered is bullish and look at the MACD about to cross, which has been a solid signal for gold of late.