Risk Appetite Improves Ahead of Earnings Reports

• Earnings Provide Distraction From Geopolitical Risk;

• UK Labour Market Strengthens Ahead of May BoE Meeting;

• German Economic Sentiment Slumps to Five and a Half Year Low.

“Earnings season could provide a welcome good news distraction”

With geopolitical concerns appearing to ease in recent days, risk appetite is gradually returning to financial markets with US indices poised to open in the green for a second consecutive session.

Sentiment naturally remains quite fragile but in the absence of an escalation after the US, UK and French strikes in Syria over the weekend and assuming no more trade war threats – both of which are far from guaranteed – indices could continue to gradually pare the losses made since late January. Earnings season could provide a welcome good news distraction in the meantime, with 13 S&P 500 companies due to report.

“The data this morning goes some way to supporting the need for a rate hike”

The economic data from the UK this morning – the first of three important reports this week – was more positive than negative but questions remain about whether it justifies a rate hike from the Bank of England next month. The central bank has strongly hinted in recent months at an increase next month, citing above target inflation and a tight labour market as necessitating such a move but many are questioning the rationale for such a move, particularly given the cloud of uncertainty that hangs over the economy due to Brexit.

The data this morning goes some way to supporting the need for a rate hike. Unemployment is at a 43-year low, employment is the highest since records began and wages are rising, surpassing inflation for the first time in a year, albeit only by 0.1%. On the face of it, all looks positive and with inflation well above target, a rate hike looks sensible. The only issue is that inflation was driven by a one-off currency devaluation, not demand, and is falling while wages are only growing moderately after a prolonged consumer squeeze. Not the ideal environment to be raising rates.

With the pound doing well, that could apply further downside pressure on inflation going forward, although it has slipped a little after the data, more likely due to profit taking after recording seven straight days of gains against the dollar, rather than lower rate expectations. With inflation and retail sales data still to come, it could take something significant to derail the BoE’s rate hike plans.

“A number of factors are likely feeding into this though including the potential for a trade war involving the US”

The data from Germany looks more concerning at first sight, with economic sentiment slipping to its lowest level since November 2012, according to ZEW. A number of factors are likely feeding into this though including the potential for a trade war involving the US. While this may point to a slight slowdown in the economy, I don’t think it’s anything to be concerned about and growth is still expected to remain quite strong.

There’s plenty more data to come from the US today, with building permits, housing starts, capacity utilization and industrial production figures all being released. We’ll also hear from a number of Federal Reserve policy makers today including John Williams, Randal Quarles, Patrick Harker and Charles Evans, the first two of which are voting members on the FOMC and in recent speeches have stuck to the central banks message of gradual tightening, with Williams having hinted at three to four hikes this year.