Daily Market Update 13th May 2009

Daily Market Update 13th May 2009

It seems that there is still some life in stock markets after the recent bout of profit taking. Although Wall Street ended mix, Asian bourses (with the exception of Australia) rallied overnight and futures contracts suggest that European bourses will open higher. We still believe that it is too early to call a bull market, but it does seem that there is plenty of interest in buying stocks below established highs before selling them on rallies.

The euro managed to rally as London markets opened, with the single currency hovering just under $1.37 against the US dollar. Euro-sterling rose to £0.8976 in early trading before the rally ran out of steam. The dollar has remained on the defensive following reports that the US’s AAA credit rating was potentially facing a downgrade should the government fail to show that its finances are back in order. While we doubt that such a downgrade would happen given the possible damage that would cause to the financial sector, weak US fiscal dynamics are a reminder that the dollar will struggle to find support in the months ahead.

With UK labour market data released a day early yesterday, the BoE’s Quarterly Inflation Report remains the key event this morning. For the first time in several quarters, the MPC should not have to revise down their growth forecasts. Still, the market will be looking at their growth projections for 2011 closely to see if there is any split from HMT’s 3.75% forecast. It will be interesting to see how the MPC have treated the slightly higher than expected inflation outturns. Do they still look for a sharp fall, or are they now happy that a weaker exchange rate has prevented deflation?

We anticipate that most questioning will surround existing Quantitative Easing measures and any exit plans that the BoE currently has. We would also expect probing on how the MPC cold ask for additional QE funds should it decide to go beyond the £150 billion level permitted by the Chancellor.

US Advance retail sales are hard to accurately forecast given the Easter effect in April. Not only does it make seasonal adjustment difficult, it also breaks the relationship between weekly sales data and official data. The market is looking for a flat outturn in headline sales, but Easter doe suggest that there could be some upside risks. Still, given the volatility, market reaction could be muted.

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