US indices seen opening lower again on Friday

Good morning,

• US indices seen opening lower again on Friday;

• Investors again questioning record levels;

• Yesterday’s inflation reading casting doubts over ECB stimulus;

• Indian Sensex rallies on business friendly election results;

• US consumer confidence and housing data key today.

We’re not seeing the rebound in US futures that could have been expected following yesterday’s sell-off in the S&P and the Dow, with both shedding around 1% on the day. Ahead of the opening bell, the S&P is lower by 4 points, the Dow lower by 31 points and the Nasdaq lower by 8 points.

With US indices having hit new record highs again this week, investors appear to be once again questioning whether the current levels are justified or whether everyone is potentially getting ahead of themselves. At the same time there is an increasing appetite for bonds again, with the ECBs apparent willingness to ease monetary policy, giving investors an incentive to buy bonds again, which is something they haven’t had since the Fed began tapering. While the biggest beneficiaries of any stimulus program will undoubtedly be eurozone bonds, particularly peripheral debt, yields across the board have been falling, pushing US Treasuries back below 2.5% for the first time since October. This

The caution being seen today, with European indices also trading slightly lower, may also be a response to yesterday’s eurozone core inflation number which has cast doubt over whether the ECB will announce a monetary stimulus program at the next meeting. The governing council may view the surprise increase in the core number from 0.7% to 1% as a get out of jail free card that allows them to delay the decision by a few more months. They’re clearly reluctant to test the water with unconventional monetary policy and appear to be more than willing to delay the inevitable given the opportunity. This being up in the air is not in itself a reason to sell, but it is going to make people more reluctant to buy until they’re more confident that stimulus is on its way.

Asian stocks fared no better than their US counterparts over night with the Nikkei shedding 1.41%, the Australian S&P ASX 200 falling 0.58% and the Chinese Hang Seng ending marginally lower. The Indian Sensex on the other hand ended the session 0.9% higher after early results showed the opposition BJP led by Narendra Modi easing to a majority which is seen as a victory for both business and the economy. Modi was largely expected to win the election and the results have already been mostly priced in. What we’re seeing right now is an element of relief that the results are in line with expectations.

The US session today is looking fairly quiet, which isn’t unusual given that it’s the end of the week and not much data is scheduled for release. Of the data being released, the preliminary UoM consumer sentiment reading stands out as quite an important reading. The consumer is extremely important for the US economy so any indication that confidence is on the rise as we head into the summer is likely to be cheered by traders. Building permits and housing starts will also be tracked closely given how important the housing sector has been in the recovery last year. Recent data has shown a slowing in the recovery in the sector which is being attributed to rising mortgage rates. Given that rates are going to rise significantly in the next couple of years we need to see a change in this trend or the recovery may not be quite as strong as many are currently expecting.