Europe

It’s been another slow day for European stocks; with the DAX underperforming, however, the tone has still been broadly positive despite the basic resource sector underperforming after the latest industrial production and retail sales data out of China, missed expectations. Weaker commodity prices also aren’t helping with Anglo American and Glencore near the bottom of the index.

The FTSE100 was still able to put in a new post pandemic high above 7,220, before slipping back with most of the markets attention on this evening’s Federal Reserve rate decision, which in all probability will turn out to be a complete non-event.

It’s highly unlikely the Fed will say anything that might upset the apple cart risk wise, though we could well see the early signs of some discussion of a timetable to tapering in its monthly bond purchase program, which is currently running at $120bn a month. In light of recent data, it would be more surprising if they didn’t start a discussion of this nature.

Today’s surprise jump in UK inflation above the Bank of England’s 2% target doesn’t appear to have caused that much consternation despite the rises in the likes of clothing, fuel as well as restaurant meals and drink as indoor dining reopened.

US

US markets have opened steady as she goes ahead of today’s Fed meeting, shrugging off some weak housing starts and building permits data for May. The weak data may well have had something to do with the big move higher in lumber prices that we saw in May, and which probably prompted a slowdown in construction due to the higher costs. We could see a rebound in June now that prices have slipped back.  

Citigroup has followed JPMorgan Chase in issuing a warning over its trading revenues for the latest quarter, with its shares sharply lower. The lower levels of volatility relative to last year was always going to be a challenge, however Citigroup also pointed to slower loan growth due to consumers sitting on the proceeds of their stimulus payments.

Roblox shares plunged on the open after active users in May declined from the numbers in April, while overall spending on the video game platform was also lower from a year ago.

Royal Caribbean and Norwegian Cruise Line shares have edged higher after the sector was on the end of a broker upgrade citing improving trends on bookings and pricing in the US market. While there is some uncertainty over the restart of the US cruise season, there is an expectation that once dates have been confirmed there could be a further surge.

FX

The US dollar is trading sideways ahead of today’s FOMC while US 10-year treasury yields are more or less flat on the day just below 1.5%.

The pound has had a fairly decent day after this morning’s hotter than expected May CPI number, which came in at 2.1% and the highest level since July 2019. More importantly core prices came in at 2%, and their highest levels since August 2018. This isn’t likely to be the high point either given that higher input prices are likely to continue to trickle down into consumers’ pockets. It certainly gives the Bank of England something to think about next week, and offers some vindication for outgoing chief economist Andy Haldane’s recent comments that the UK economy is enjoying a decent recovery. While we don’t expect the MPC to be alarmed at what’s happening to CPI, far from it, they will welcome it, we may see them pare back their weekly bond buying program even further. At the last meeting they reduced it for “operational reasons”

Commodities

Crude oil prices continue to look resilient, largely as a result of falling inventories, however we also need to keep an eye on gasoline demand, with the US driving season well underway. With US prices now above $70 a barrel there is a risk that the prospect of higher demand will prompt US shale producers back to the table, as the prospect of an Iranian deal recedes into the distance.

While it is easy to be bullish on oil prices it is also important to remember that oil output is much lower than was the case back in 2018, which means there is scope for additional spare capacity to come back on line quite quickly once we get anywhere near $80 a barrel. Today's inventory data showed a bigger than expected decline of 7.36m barrels, however gasoline inventories rose more than expected, a rather surprising outcome at a time when gasoline demand should be increasing.

Gold prices are currently struggling to rally off their recent lows just above the 200-day MA, with today’s Fed decision likely to precipitate the next move up or down. The price currently looks soft with a failure to move above $1,880 potentially opening up a move towards $1,830.     

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