Business

Fragile tone to market sentiment carries over ahead of 'Super Thursday'

Much focus will be on the tone Bank of England governor Mark Carney adopts in his press conference this coming 'Super Thursday'
Much focus will be on the tone Bank of England governor Mark Carney adopts in his press conference this coming 'Super Thursday' Much focus will be on the tone Bank of England governor Mark Carney adopts in his press conference this coming 'Super Thursday'

THE fragile tone to market sentiment has carried over into the start of May. Disappointing survey data out of China and also the UK, as well as some mixed numbers from the US, have done little to ease concerns of a slowdown in the global economy.

And as a result, risk aversion has been very much in evidence in the financial markets in recent days. The Euro Stoxx 50 fell by over 3 per cent last week and is down around 10 per cent in the year to date. US equities have also suffered, although to a lesser extent, with the S&P 500 just about in positive territory since the start of the year.

The continuing concerns about the outlook for global growth are also reflected in bond yields, which remain anchored at very low levels. Indeed, in the past week, the yield on 10-year US Treasuries dropped back below 1.8 per cent, while the yield on 10-year UK gilts was down around 0.15 per cent last week to near 1.45 per cent.

It is not just market participants/investors that are concerned about developments in the global economy and on financial markets. These concerns are also shared by the main central banks which have adopted a much more cautious approach and tone in recent months.

This is likely to be reemphasised in this week’s Bank of England ‘Super Thursday’ which includes the May policy meeting outcome (no changes in UK interest rates expected) and meeting minutes along with the May Inflation Report and a press conference from Governor Mark Carney.

As always, the financial markets will be looking for any new insights into the current thinking of the Monetary Policy Committee to assess a possible time-frame for policy tightening in the UK. The updated forecasts contained in the Inflation Report (including inflation, GDP and wages) will be important signals in this regard.

The underlying tone of the updates is likely to be similar to that of the April meeting minutes which were generally cautious. They emphasised the need for prudence due to the uncertainty related to the upcoming EU membership referendum and the potential for it to “lead to some softening in growth”. In terms of the current market consensus, futures contracts are not pricing in a UK interest rate hike in the UK until the second half of 2018.

Data-wise, the main UK release this week is the March industrial production number. Output was soft in the first two months of the year, largely due to weaker oil extraction and manufacturing as a result of falling oil prices and slowing global demand. Production is expected to have improved in March.

Meanwhile, the key focus in the US is on the consumer side of the economy. Retail sales fell slightly in the first quarter of the year - weighed down by declining oil prices and auto sales. They are predicted to start the second quarter on a stronger footing, with a solid increase anticipated in April.

Elsewhere, March industrial production is also due from the Eurozone. It fell back in February, after a very strong start to the year. This partly reflects a decline in the energy sector as temperatures rose. Output is anticipated to have improved in March, meaning the pace of growth is likely to have picked up in the first quarter of the year. This would be consistent with last week’s Eurozone GDP data which showed that growth increased to 0.6 per cent.