European markets saw another decent day yesterday, however the recovery still has some way to go before reversing the losses from earlier in the week. This task became a lot harder after last night’s selloff in US markets on reports that President Biden was looking to increase the rate of capital gains tax to 39.6% for those Americans earning $1m a year or more, up from the current rate of 20%, with some wealthier individuals seeing their rates go up to 43.4%.

This had the effect of turning what was already a fragile rebound, completely on its head, pushing US stocks back to their lows of the week, with the Nasdaq leading the losses.

While one could argue that the prospect of higher taxes is never welcome, and a doubling of a key tax rate even more so, the likelihood of anything of this nature passing through an evenly split Congress, lies somewhere between slim and none, however in these highly uncertainty times it doesn’t take much to spook a little bit of profit taking, in what has already been a very choppy week. The reality is taxes may rise but certainly not by as much being touted.

Uncertainty levels about rising infections in India and Japan delaying a global recovery had already seen markets start the week on the back foot, so it didn’t need much of a nudge for markets to turn tail.

Last night's reports are likely to be the opening salvo of a guerrilla war campaign between Democrats and Republicans on how to pay for the huge fiscal stimulus plan that has only just been unleashed as recently as a month ago. For the Democrats to then go ahead and torpedo the effects of that with a raft of tax hikes would be moronic in the extreme. This story is likely to run for quite a while yet.

Even so European markets look set to open below where they closed last night as a result of last night's sell-off with the main focus today set to be on UK retail sales, and public sector borrowing for March, along with April flash PMI’s from France, Germany and the UK.

Starting off with UK retail sales it's highly unlikely that the first quarter of 2021 will see a positive number for consumer spending, given the 8.2% decline seen in January, and the fact that the UK has been locked down for all of the quarter. February did see a 2.1% rise primarily as a result of people shopping in garden and DIY centres, as we saw a 16% rise in household goods. Any upside to March is likely to be of a similar pattern to February, with a 1.5% gain expected, with garden centres likely to continue to do well as gardeners prepare for the spring.

The overall picture for Q2 now looks much more positive, on the back of an impressive vaccine rollout which is helping to underpin consumer confidence, and which has seen UK GDP show a much shallower contraction in January and February than was originally feared. The biggest drag on retail sales in March will continue to come from the closing of non-essential retail as well as pubs, bars and restaurants which are set to see extremely subdued levels of activity if any at all, though as recent retail numbers have shown the boom in online and digital sales is helping compensate in other areas.

Annual public sector borrowing is set to hit a new post-war record with the release of today’s March numbers. Tax receipts in February fell back as another £19.1bn was added to the national debt, making it the first time in a long time that the UK government has had to borrow in every single month of the fiscal year. It shouldn’t be too much of a surprise though with so many businesses closed. In the current fiscal year to February net borrowing rose to £278bn with today’s March number expected to see borrowing get close to, and even move above £300bn, with expectations for another £22bn. This is still lower than was originally forecast a few months ago and has been helped by a number of businesses returning their furlough, and business rates money as they successfully adapted their businesses to a more online model. We also saw a much better-than-expected tax take in January prior to the end-of-year self-assessment deadline. This sort of spending is set to continue for a while yet given the extension to furlough, however markets still seem content to take it in their stride. It’s not as if the UK is alone in this regard.

We finish up with the latest April flash PMI numbers, from France, Germany and the UK.

It has been notable that manufacturing has adapted much better to Covid restrictions than has services, but it's also not surprising. In both France and Germany, the manufacturing PMI numbers have been very strong, even if the French manufacturing production numbers tell a different story.

Services have shown signs of improving but have thus far remained stuck below 50 in Europe, though Germany did squeak back above 50 in March at 51.5. France services are expected to stay in contraction at 46.7, while manufacturing for both is expected to come in at 59 for France and 65.6 for Germany.

As far as the UK is concerned both manufacturing and services are expected to be well above 50 at 59, and 58.9 respectively as the UK economy continues its reopening process.  

EURUSD – the 1.2080 area continues to cap the upside, while we also have support at 1.1980. We need to see a break either side to signal the next move. The lack of upside momentum is a concern, suggesting the bias for a shift lower towards 1.1930.

GBPUSD – this week’s failure at the 1.4000 level has seen the pound slip back, breaking down through the 50-day MA, with the potential to move towards the 1.3760 area.

EURGBP – starting to squeeze back higher again with the key resistance still at last week’s highs, and the 0.8730 area. While below the bias remains for a move back towards the lows this week.

USDJPY – trend line support from the January lows at 107.70 is currently holding the downside, with the potential to move back to the 108.30 area. Below 107.60 opens up the prospect of a move back to the 106.80 area.

FTSE100 is expected to open 20 points lower at 6,918.

DAX is expected to open 56 points lower at 15,264.

CAC40 is expected to open 6 points lower at 6,261.

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