UK open: Mixed markets today

FTSE outperforms on IMF, vaccine news, FOMC minutes in focus

European bourses are trading in a mixed fashion, following on from a record reaching session on Tuesday. The prospect of a faster global economic recovery and news that the European covid vaccine programme is expected to ramp up rapidly over the coming weeks boosted risk sentiment.

Not only were riskier assets such as equities in favor across the board, but we also saw evidence of the European recovery trade in play. A rotation into European stocks sent the Dax and Euro Stoxx 50 to fresh all-time highs.

Today the FTSE is the clear outperformer thanks to a vote of confidence from the IMF, a softer pound and rising commodity stocks.

According to the IMF Britain is now expected to see economic growth of 5.3% this year, and upward revision from 4.3% forecast just a few months ago thanks to the rapid vaccine programme being deployed across the UK. Adding to the good news, the Moderna vaccine will start to be rolled out today, 2 weeks earlier than expected. Very appropriate timing, just as the AstraZeneca vaccines for under 30’s is thrown into question.

The importance of a rapid vaccine rollout can’t be overstated. Quite simply the quicker the population is vaccinated the quicker the reopening process can happen and the less likely that deep economic scars will be left. The IMF forecasts have homed in on that fact.

Germany, which is experiencing a resurgence in Covid cases, in contrast, is expected to grow a more disappointing 3.6% this year, according to the IMF.

Service sector PMI data was more upbeat for the region and particularly Germany. The composite PMI, a good indication of economic activity, surged in Germany to 57.3, well above the 51.3 forecast.

Looking ahead to the US open futures are pointing to a muted open ahead of the minutes from the latest FOMC minutes. Investors are opting to sit on the sidelines as stocks hover around all time highs ahead of the FOMC minutes. Whilst US treasury yields are trending lower today, any sense of a more hawkish Fed could reignite the bond market rout which dominated in the first three months of the year.

FX – Dollar ticks higher ahead of FOMC minutes

The US Dollar is edging mildly higher, although remains around 2 week lows, as bond yields continue to edge lower.

US Dollar bulls are pausing for breath after a strong rally across the first quarter of the year. Rising expectations of strong US economic rebound and higher inflation raised questions over the Fed’s ability to stick to its ultra-loose monetary policy.

Bond yields shot higher across the first quarter of the year. However, the bond market selloff has run out of steam since the start of the new quarter and yields on the benchmark 10 year treasury are actually down some 4% so far this month.

Interestingly, yields are sliding despite impressive jobs market data. Friday’s non farm payroll report and yesterday’s JOLTS job opening numbers suggest that the US labour market is creating jobs at a much faster rate than initially expected. The Fed has continually said that the labour market needs to recover before interest rates rise, which is starting to look like it will be sooner rather than later.

Attention will now turn to FOMC minutes. Investors will be scrutinizing the minutes for any clues that the Fed could start raising interest rates sooner than 2024.

Gold slips in cautious trade

After strong gains in the previous session Gold is trading on the back foot, pulled lower by the upbeat tone in the equities market and a degree of caution among Gold traders ahead of the FOMC minutes later today.

The reflation trade has been fueling expectations of a strong US economic recovery and a rise in inflation. Investors are convinced that stronger fundamentals will force the Fed to raise interest rates sooner than initially planned. Investors will be pouring over the FOMC minutes for any signs that tightening monetary policy was being discussed at the March meeting. The slightest hint of a more hawkish Fed could drag heavily on non-yielding gold sending it back towards the recent multi-month low of USD1677.

Oil fails to take USD60.00

Oil prices kicked off the session higher on Wednesday, before quickly paring gains. WTI continues to trade below the key USD60.00 per barrel level. Whilst on the one hand a draw in crude inventories and optimism surrounding the global economic outlook are boosting demand for oil. On the other, concerns over higher output and optimism surrounding the US Iran nuclear programme talks are acting as a drag.

Oil prices are struggling to find their feet. Demand needs to pick up substantially in order for the price to be able to absorb the production increases that OPEC+ are planning over the coming months. Europe’s plans to have herd immunity by the end of June could be a significant factor here but investors will want to see how this pledge plays out in the coming weeks before getting too excited.