 Good morning. Welcome to CMC markets on Friday the 26th of May and this quick look at the week ahead with me Michael Houston and it's been an interesting week. There's been a number of factors at play Which has driven the declines that we've seen so far this week We are start we are getting a little bit of a Friday respite On the back of probably a little bit a little bit of a profit-taking bargain hunting Whatever you want to call it, but certainly I think one of the things that we have seen over the course of the past few days is a significant reassessment of the risk outlook Amongst investors given the sharp decline that we really started to see Gain traction on Wednesday a big big fall in markets. Obviously there are a number of drivers to The sell-off that we've seen this week We are seeing a little bit of a rebound now as we head into the weekend But there's no question that obviously the debt ceiling is Having a part to play in it even on the margins I mean you could argue that, you know, perhaps the risk of a US default still remains pretty close to zero and I would probably Go along with that to a certain extent But nonetheless Combined with concerns about a flaky Chinese recovery Rising rates and I think that has been one of the notable takeaways from this week's Price action has been the sharp spike that we've seen Not only in UK rates and that's no better illustrated than by this chart here of the UK Two-year guilt yield, which is back now at the levels that we saw back in September and October in the aftermath of the quasi-quarting budget Which was quickly reversed But it this this this rise in UK rates isn't just about isn't just a local issue It's been more broadly replicated in The US where we've seen a big big rise in US two-year yields We've also seen an increase in European yields and a large part of the reason for this rise in yields is that inflation Continues to look much stickier than an awful lot of Market pricing had suggested it might have been two or three weeks ago Now this is not a surprise to me What is what is a surprise is that it's a surprise to markets and what we're seeing now Is a significant readjustment of pricing when it comes to the prospect of further rate? I exist the Fed done well Certainly on the basis of what we've seen so far over the course of the past few days perhaps not The hawkish rhetoric coming out of the Federal Reserve Policymakers does suggest they've probably got one more in the tank The big question is whether it comes in July whether the signal puts or if signal whether it comes in June rather whether it comes in July I can't see the point of hiking rates in July and pausing in June You might as well get out in front of it hike in June and then take a take a step back now Obviously the payrolls numbers Coming up in the in the week over the course of the next week or so should give us further insight Into whether or not the Fed feels it's wise To perhaps pause now what signal will that send to the bond markets? We've got US PCE core PCE later today. Obviously as I record this video. We don't have visibility of those numbers, but We're unlikely to see a big drop in core prices given the fact that first quarter GDP Core PCE actually rose to 5% and yes, it is backward-looking, but nonetheless. It's the last three months and as we well know core inflation Doesn't really come down that quickly. We've certainly seen that in the UK this week headline inflation came down from 10.1 to 8.7 Which was slightly less than expected But core prices went from 6.2 percent to 6.8 so hats off to the Bank of England there They've done a sterling job. No pun intended in capping inflation and particularly core inflation so With that in mind, and I think that's really why you can sort of see what's happened with respect to market pricing to two-year gilts is that You know and you know pains me to say it but When you look at two-year gilts Fix rates generally tech fixed rate mortgages generally tend to be priced off this particular number and If you've got a fixed rate mortgage rolling off Over the course of the next few months. You better hope this spike in yields proves temporary in nature You know certainly in the weeks between now and the next Bank of England meeting because the pressure is on the Bank of England now There are no wins, you know, this is the no wins scenario for them Because they've delayed and procrastinated when it comes to raising rates, you know in the same manner the Federal Reserve Yeah, they delayed as well, but In less than the number of meetings. It's taken the Bank of England to get to their current base rate 4.5% They're over they're over 5% So, you know, if they've been slightly more aggressive in the beginning, perhaps core prices Wouldn't be as high as they are now. Who knows, you know We will never know the counterfactual on that particular discussion and now they're in a position whereby You know, do they ignore the fact that core prices have gone higher and let that slow the economy down and perhaps even become more entrenched? Do they hike again and again and potentially tip the economy in reset into a self-induced slowdown? Or are they very or are they Significantly more aggressive and do 50 points for the next meeting in June Given the fact the Bank of England has never been particularly aggressive when it comes to raising rates I think the the latter is unlikely and really one of the first two options is more likely nonetheless I think the damage is done and yes, we'll probably get another 25 basis points Whether we get more than that is another matter and the ECB has a similar problem Given the fact the German economy is slipped into recession in the first quarter of this year So as we look ahead to next week, obviously the debt ceiling Continues to be a clear and present concern for markets and that first of June deadline looks like it's going to be missed Maybe finding a little bit more money down the back of the soap You should see that extended out to the 7th of the 8th of June, but there is a deal emerging It would appear and this deal would raise the limit cap spending for two years With defense spending permitted to rise three percent next year. So there are there are there is the framework emerging And we could we'll see The finer details of a deal emerge in the upcoming week. So it's about the debt ceiling It's about non-farm payrolls on the 2nd of June and it's also about EU flash CPI For may on the 1st of June other than that We've got UK mortgage approvals on the 31st of May as well as net consumer credit We've got manufacturing PMIs and one of the things that we saw from those manufacturing flash PMIs that we saw earlier in the week was that Manufacturing activity continues to remain subdued particularly in Germany where it hit the slowest level since June 2020 and numbers released earlier this week On the earnings front, there's only really a couple of noteworthy items Broadcom second quarter earnings They got a nice lift on Thursday Largely, I think as a result of the Nvidia Effect saw that spike significantly higher, but they've also just signed a deal with Apple Which is which was greeted very positively and this this deal with Apple is to Sell 5g 5g components Multi-billion dollar deal, which is obviously given this particular this this chipmaker in the broader chip sector A big lift over the course of the past few days So we've seen the Nvidia effects 11 billion dollar guidance for second quarter earnings data centers and artificial intelligence Effect there the data center. I think the data center numbers were particularly um, noteworthy 4.2 4.28 billion dollars Given the fact that three years ago their whole quarterly revenue was around about 3.8 3.9 Billion dollars and that was for everything including gaming So the fact that data center revenue accounted for more Than the revenue quarterly revenue that we saw three years ago Here's you an indication of what a monster or what a beast Nvidia is the bigger question is is it worth what the markets Are currently valuing you that Unfortunately, whether or not you think it's worth The current valuation is neither here nor there. You can't really stand in front of a one-way train um, nonetheless, let's have a quick look at the markets. Let's see 100 Slipped lower quite sharply over the course of the past three days started off the week modestly well Slipped back to its 200 day moving average. So that's for me. I think is really the key level 7500 we've seen a bit of a hiccup Over the course of the past few days The bigger question is whether or not we can hold above this long-term moving average and sustain Some of the gains that we've seen so far this year We are now of course back in negative territory or just about just about in positive territory for The year but it certainly doesn't do my call for a return to the 8000 level. It's not particularly helpful, but you know I think while we're above the 200 day moving average. I still remain Modestly optimistic the DAX similar again seen a very sharp pullback But again, we need to put this in the context Of what this chart is doing here and we're still very much in the uptrend that we've been in since the September and October lows. So we're always going to get a bit of a pullback We've got the pullback. The bigger question is whether it's symptomatic of a broader weakness. This is a worry potential bearish weekly candle here I think really when we look at it, this needs confirmation Where's the confirmation? Well, it will be a break below the support level here 15,700 a break below that and we could well see Further weakness in the DAX so very much technically driven. Yeah, the candles can offer clues But ultimately it's really about key support and resistance levels and at the moment They are continuing to hold similarly for the s and p 500 weren't able to sustain that move above 4200 but again As in the DAX we are still in the uptrend. We're still above these lows here Thus far, I would expect to continue to see The type of range trading that we've gotten used to over the course of the past couple of months. So No change there really NASDAQ obviously the NASDAQ has driven most of the rally that we've seen in the latter part of this week And we have seen a significant breakout in the NASDAQ Um Support again around about 13,600 now that we've broken through that 50% Fibonacci retracement level I'm expecting to see on the basis of these technicals further gains for the NASDAQ To the 61.8 Fibonacci retracement level of this entire down move here that level is 14,300 and 40. So we're only 400 points away from that And you know, we we need to understand this is a very sector-specific Driven rally if you strip out tech From this move higher US equity markets are actually lower on the year That gives you an indication of how much Tech has driven this particular rebound And you know, if you want if you want evidence To that effect you only need Look in the direction of the components of the NASDAQ 100 right here top 10 best performing Stocks are in video now nearly 160 up on the day The NASDAQ itself up 27.4 Year on year So not on the day on the year and meta platforms Advanced micro devices AMD they got a big boost as well. So you've got these three big caps here Driving most of the rally higher in US markets So it's important to bear that mind bear bear that in mind when we're looking at this particular market rebound It is very very narrow But I am encouraged by the fact that Uh, European markets even though they've been weak this week. We haven't fallen off a cliff quite yet. So um, the bigger question is How much of a drag Do higher rates Or the prospect of lower rates being pushed out into 2024 have On broader asset prices and at the moment there is this sense that These higher these higher rates Are starting to act as a drag on risk That's certainly no more prevalent that it is in euro dollar and the dollar in general The dollar has continued to gain the euro dollar is still in this downtrend. This is the four hour chart. We're looking at here If we change that to one day We can see that there's certainly potential for us to head back To 106 20 on euro dollar if we continue to get the gains That we've certainly been seeing since those peaks in euro dollar or the lows in you or the lows in the dollar that we saw Back in may That's very much trend driven this market at the moment the line of least resistance for the dollar is higher And for the euro is lower and that's really I think that's really borne out in dolly n Which went back to 140 this week um And that that was significant because it was essentially 50 replacement Of the entire down move from the october peaks To the lows back in january. So the bigger question for me Is whether or not we can crack through 140? Why is 140 significant? Aside from the fact that it's a round number We've got a bit of a confluence of resistance levels coming in in and around between 139 60 and 140 And we really want to see a clear break of that level Before we can consider the possibility that we could go higher um We've got a bank of japan rate meeting coming up in the coming weeks bank of japanese inflation is At a significant high level So the bigger question is does the bank of japan start to send out signals? Perhaps that it's going to be moderating on tweaking It's your curve control could that bring the dollar rally that we've seen over the course of the past few weeks to a shuddering call We won't have to worry about that for some time. So that's um, you so that's basically the dollar We've got us payrolls coming out for may and The expectation there is that we could see 180 000 jobs added But one of the things I would say about non-farm payrolls is that over the past few months analysts economists have consistently underestimated the resilience of the labor market the u.s labor market And um, particularly, um consumer confidence Every single month we've seen the headline number come in above estimates April's jobs was no different coming in at 253 Unemployment rate for three point four percent wage growth also aged up to four point four percent now there was a downside In those numbers because we saw a negative 149 000 adjustment to the previous two months But they don't affect the underlying resilience or the support the they don't support the idea That the u.s economy is struggling weekly jobless claims are still trending at between 225 and 235 a week so There are still nine and a half million vacancies um You know the number has declined by more than two million since the peaks of march last year But they're still well above the levels that were pre-covid When vacancies are around about seven seven and a half million So you know to pretend that the u.s labor market Is cheer rating? Well, I suppose it really depends on how you look at it and if you look at the participation rate That has been rising over the course of the past Few months to 62 Point six percent now it was 61 point three percent It was 63 point seven percent pre-pandemic So it's in the middle of where it was and where it has been So the bigger question is are more people coming back to the labor market? And the answer would appear to be yes, they are The bigger question is it will that continue adp has also remained fairly solid rising by 269 000 in april so Headline numbers for non-farm payrolls for may 180 000 on the headline Unemployment rate to tick a little bit higher to three and a half percent and wages to stay Really sticky around about four point three four point four percent. We've also got a ucpi flash cpi That was sticky in april Around about five point six percent. We're expecting to see a modest tick down in core cpi to five point five We did see a tick up in headline number to seven percent in april That is expected to drop back to six point four percent in may again. That's out on the First of june so u.s payrolls On friday flash cpi on thursday we've got a short week next week anyway because we've got A monday bank holiday. It's memorial day in the u.s Obviously, we've got the bank holiday the end of may bank holiday here in the uk as I say, there's not really that much in terms of Earnings numbers i'm going to quickly finish up by looking at cable because cable has looked particularly weak despite the fact that markets are pricing in peak bank of england rate of around about five base rate of around about five and a half percent six Five and a half percent, which is 100 basis points above where we are now Will the bank of england push rates that high? I seriously doubt that So that would suggest that perhaps the uk guilt yields two year guilt yields do have scope perhaps to come back down again Let's hope so If you're a mortgage holder But overall if we look at the way cable has been trading Has been trending lower. We've broken below the 50 day moving average We've also broken this little line here, which i'm now going to knock out So the bigger question is where is the next support level on this? So for this i'm going to use the banachi Select these lines here See whether or not any of these levels coincide with some key support areas of support Now will they coincide with this low here with this peak here? um So we could well see A little bit of support coming around about the 122 70 area And certainly I had that as an area as an area of some support On my daily analysis, which I which I post on the website Every day so 120 270 We could find a little bit of a base in and around there If we do break below there, then we're certainly looking at potentially 120 130 over the course Of the next few weeks, but any significant weakening of the dollar Could well prompt a little bit of a rebounding cable now what could cause that well a weakening of the dollar Perhaps a resolution Of the us debt ceiling that removes one layer of risk to Investor sentiment removes it from the radar and then it's really just a question of How do um, how do markets perceive? The china recovery story. How do they perceive? um the prospect for Further rate rises going forward okay, so That's pretty much it for me for this week once again. Thank you very much for listening I hope you all have a great bank holiday weekend speak to you all same time Same place next week and obviously don't forget to tune in for the non-farm payrolls webinar, which is um Which is due to start just after 1 p.m On friday and go on until about 145 2 p.m. Thank you. Have a great weekend