Market update (16 May, 2018)

May 16, 2018 Written by Gavin Pannu, MSTA, CFTe

FTSE 100 remained bullish as sterling failed to list a solid jobs data, while stocks around the world were under pressure amid rising Treasury yields. The main focus in the UK had been on labour market data from the Office for National Statistics, showing average weekly wage growth slowed to 2.6% in March from 2.8% a month before, but employment expanded at the best quarterly rate for more than two years. Cable remained range bound and traders look to next week’s inflation report.

Excluding bonuses, average earning rose 2.9%, the fastest pace since August 2015, while regular pay in the private sector, which has been a key measure cited by the Bank of England, rose 3%. Unemployment remained at 4.2% but employment increased by 197,000 to 32.34m in the first quarter, the biggest quarterly rise since the end of 2015.

UK productivity, however, relapsed in the first quarter of 2018 after a pick-up in the second half of 2017, with output per hour dropping 0.5% quarter-on-quarter after gains of 0.7% and 1.0% in preceding quarters.

The aggregate of robust employment growth, falling unemployment and stronger underlying earnings growth, as well as a clear relapse in productivity in the first quarter looks supportive to a Bank of England interest rate hike in August. However, much is likely to depend on whether the UK economy continues to show clear signs of improvement over the coming months.

The dollar rose and the yield curve steepened, with the US 10-year note hitting 3.09%, its highest read since 2011. Led by stronger US retail sales data, indicating that consumers are gaining confidence to spend more after some negative readings year to date. The move higher in yields put pressure on stocks, leading the Dow to close lower for the first time in nine days.

Asian stocks also slumped over fears that the US-North Korea relations had hit a road bump, and as the Japanese economy showed signs of slowing down. The Asia-Pacific MSCI index fell 0.2 per cent as Japan’s Nikkei slid 0.4 per cent.

Brent tested $79 per barrel, closing in on the psychological threshold of $80 per barrel. However, benchmark prices posted modest losses during the trading session. The oil market continues to tighten with OPEC keeping barrels off of the market and reducing inventories down to the five-year average. The near-term tension between bulls and bears will continue to be dominated by geopolitical risk, with fears of outages in Iran pushing prices up.