 Good morning. Welcome to CMC Markets on Friday the 27th of May and this quick look ahead at the week beginning the 30th of May and what is going to be a shorter week than normal we've got two bank holidays on Thursday and Friday to celebrate Her Majesty the Queen's Platinum Jubilee 70 years on the throne so the main item of the week will be on the Friday it'll be non-farm payrolls and that could well give a little bit of an indication in terms of wage growth as to whether or not the Fed is likely to pause after the 250 basis point rate hikes that are priced in for June and July. Before we get on to that the payrolls data it's always a good idea to look back at the week just gone and it's been a broadly positive week across the board. FTSE 100 is up around 75.60 post some fairly decent gains this week it's up over 2% over a five day period which is not too shabby in the slightest fairly decent return and back in positive territory for the year we can see that based on this little Bloomberg feature here which is quite nifty for any of you who use Bloomberg over the past five days the best performers this week have been a Cardo which is up 13% with a good portion of that gain on the back of this week's announcement of a windfall tax or an energy price levy or whatever you want to call it and you know I think that that's really been the headline for the week the the I want to say it's an unexpected decision by the government to you turn on a windfall tax even though it was only just over a week ago that they whipped their MPs to vote against a windfall tax but on Thursday they announced a plan to raise up to five billion pound over the next year or so which will go towards helping funding new measures to help eight million people on means tested benefits with a one-off payment of 650 pounds as well as 400 pound payment for everybody else to help with higher than expected energy bills and while the help is very welcome certainly to the more cashstrapped members of society I think you can be for basically the Chancellor taking measures to help out the consumer without actually approving of the means of which he's chosen to do it and certainly I think it doesn't send a particularly wonderful message that the UK has a coherent industrial or energy strategy BP has already announced that it is reviewing its investment in the North Sea and more broadly the UK and let's not forget that BP is also at the forefront of the green height hydrogen revolution and is due to make a decision take a decision next year on a green hydrogen facility in T side 2023 they've they've announced it and earmarked some funds for it but a final decision is going to be taken in 2023 so the fact that also that it's not a one-off tax but it is going to be implemented this year 2023 2024 with a sunset clause the end of 2025 suggests suggests you know sort of an Oliver twist type attitude towards the oil companies please sir can I have some more unfortunately for the UK oil and gas sector it's not BP in shells share prices that really born the brunt of this decision it's the smaller players of Sereca energy and enquest and these you can you can see the impact on this chart here over the course of the last two days I mean these companies generate less than about one and a half billion dollars of revenue per year so it's not as if there's an awful lot of profits to play with and then you've got harbour energy which was born out of the ashes of premier oil it's got debts of over two billion pounds and obviously in terms of investing in UK oil and gas this is a significant blow to the smaller players in the oil and gas sector who in recent years have struggled to get the investment to essentially get this transition fuel into renewables so again big big big falls there in enquest and also harbour energy as well which is in the FTSE 100 and see that chart there fallen quite sharply over the course of the past few weeks when talk of a windfall tax first became mainstream and obviously BP and Shell they've been able to absorb the worst of it simply on the basis that they make an awful lot of their revenue outside the UK so essentially they've they've sort of come out of it an awful lot better and I think that's the key message I think you know when we when we look at this windfall tax while it may may raise an awful lot of money in the short term in the longer term it doesn't really send a particularly positive message and you can see that here in the five-day performance of the FTSE 100 the government has also held open the possibility that they could widen the tax to the utilities providers the electricity grid providers so SSE Scottish and Southern it's down 9% over the past five days national grid down 3.3% you know the problem here it's not so much about the fact that you know we can't buy gas actually spot gas prices are well below three month forward gas prices we don't have storage we don't have infrastructure green infrastructure to be able to get a store this renewable energy and then use it as and when we need it so when you're talking about L when you're talking about Shell investing £25 billion over the course of the next decade BP investing £18 billion over the next decade you're probably going to need an awful lot more than that to upgrade the grid infrastructure as well as the storage capacity and pretty much everything else when it comes to making this transition from fossil fuels to renewables anyway so pretty misguided decision to levy a windfall tax I think at the moment the government needs to I think really focus on a much longer term energy strategy rather than the short-termist measures it sends it seems to stagger to and fro from on a week to week basis anyway that is sort of by the by let's look at the wider market because the wider market is looking pretty positive this week which does seem a little bit counterintuitive when you see when you look at some of the moves that we've seen particularly in retail stocks over the course of the past week or so and we have seen a bit of a turnaround in the retail sector obviously the windfall tax has had a part to play in that in terms of replenishing the the wallets of consumers essentially giving them slightly more regular room when it comes to their disposable income so you could essentially call this week's mini budget if you want to call it that a fiscal stimulus which in fact it is the downside to that is it probably makes a bank of England rate hike or multiple bank of England rate hikes this year over the course of the rest of this year much more likely because of concerns about potentially higher inflation and obviously the downside to this windfall tax is it could actually result in slightly higher oil prices as well oil and gas prices or more should I say more expensive prices at the pump as these companies try to restore some of the margin here that they're likely to take as a result of this windfall tax so these sorts of measures do have unintended consequences notwithstanding the damage it does to the UK's reputation as a stable investment area so thus far we've seen a fairly positive market reaction US markets look as if they're going to go they're going to post the first weekly rise in eight weeks which is always welcome getting a decent rebound in this chart in the S&P 500 here potentially that could be a bullish weekly reversal which if it plays out the way that it that it that it could well do we'd need to see a break above 4100 on a weekly basis to signal a move back towards this trend line resistance from the peaks that we saw here so I'm going to draw that trend line in there keep an eye on that over the course of the next few weeks if we break this support here this was sorry this this resistance area around about 4100 over the course of the next few days one of the one of the other catalysts I think for the rebound in markets has been the sell-off in the dollar over the course of the past couple of weeks but also the weakness in US Treasury yields which I talked about last week as well we do appear to have hit a short-term top when it comes to US Treasury yields so we've got I talked about this bullish reversal back here I then talked about the bullish reversal on the weekly chart a couple of weeks ago and again we've drifted back down again so you know if you're working on the basis that you could well see inflation potentially starting to top out we'll know a little bit more about that with the PCE numbers which you out later today but also in terms of some of the comments that are starting to come out from the Federal Reserve with respect to we'll probably get another 250 basis point rate hikes one in June and one in July but the Atlanta Fed president Rafael Bostic has floated a little bit of a trial balloon this week could we see a pause in September I think we'll get better clues about September in the aftermath of Jackson Hole in August because Jackson Hole generally tends to be a fairly key way sign if you like in terms of what the Fed is looking to do over the course of the rest of the year so you'll get the 250 basis point rate hikes one in June and one in July what happens after that you could get clues to that with respect to Jackson Hole there's also the prospect that the ECB might be looking to raise rates in July as well and September potentially I struggle with two rate hikes this year I struggle with the idea of two we might at a pinch get one which would bring the the main headline rate from minus 0.5 to 0 but given where energy prices are now given that they're not likely to come down anytime soon you do have to struggle to wonder where the growth is going to come from in the Euro area you know you can and also inflation is still at record highs CPI EU CPI is due out flash CPI for May is due out on the 31st of May and that's expected to stay at a record high the 7.5% and potentially head higher to 7.6 now core prices are less than half of that they're around about three and a half percent but nonetheless you've got a wide cross section of inflation rates across the Euro area you've got 4.8% in France that's largely due to the French government capping energy prices and imposing essentially the losses on EDF and the energy energy company there and then bailing them out but in places like Estonia headline CPI is 18.8% it's 16.8% in Lithuania so the Euro area does have an inflation problem it's just masked by an average on the headline number for EU CPI with the ECB you know it does have to set interest rates for the wider area and certainly I think there is pressure being brought to bear on Christine Lagarde to raise rates in July and certainly she said that that will happen in July she sort of held herself to a little bit of a hostage to fortune so if the data deteriorates between now and July she's going to find it very very difficult to resile from that commitment and that could be a problem going forward we've also seen weakness in the dollar and I think that has helped the broader risk recovery that we've seen over the course of the past few days and we can see that in this daily chart here the sticks and moving averages on to that here we go and again it's the 50 day moving average it could almost be you could almost inter you could almost overlay the US 10-year Treasury yield over that chart because they're almost identical in terms of look and feel the only difference is the part right rather than three weeks of declines which the US Treasury yield has this is the second of the US dollar index and you know it's a fairly decent run of run of declines it's probably the worst run of declines since August September last year when we declined two weeks in a row there well we did there as well but we're talking we're talking fairly big declines over the course of the past couple of years we look at the three-year chart we can see it we can see it there so there's certainly room to pull back a little bit further there's also room I think you can argue that we could have further to form maybe back towards 100 over the course the next few days now of course that potentially means that euro dollar could move higher and at the moment we do appear to be starting to see evidence of a little bit of a base starting to form we are pushing up against the 50 day moving average we're also pushing up against trend line resistance from the peaks in January so how we behave around about 108 is going to be very very important in the wider scheme of things when it comes to the direction for euro dollar this is now no longer valid what this doesn't do is undermine my wider view the euro dollar goes lower through 103 40 towards parity the only difference is that that move is likely to take place over the course of the next couple of years in the short term we could get a move all the way back to 111 without undermining that scenario what we don't really want to see I think is a move back above into this triangle breakout here because essentially that's probably going to completely undermine my bearish euro scenario but ultimately the big test will come around about 108 108 20 30 if we break back above these sorts of levels here we could see a wider correction the euro correction towards the upside in terms of cable we're still underperforming relative to euro again we're looking a little bit overboard we're approaching the 50 day moving average the narrative around potential rate hikes has changed somewhat with this week's fiscal stimulus I think there was an info law that there was a little bit of concern that the economy would stagnate q3 q4 obviously this week's measures announced by Rishi Sunak have mitigated that to a certain extent and also let's not forget the national insurance thresholds are also being raised in July so that's an additional boost to incomes and essentially the entire package that he's announced this week it was 15 billion pound but if you add all the measures up the other measures up that he announced earlier it comes to somewhere close to 30 billion pounds but which only five billion of that will be raised by the windfall tax always assuming that of course it even raises that much and yeah there are investment incentives within that 90 for every unit for every pound invested into the UK economy you get 91 P back so essentially a super deduction but I think the wider thing is here while that is welcome the narrative around the imposition of the tax has been such that you don't say that you're not going to do it one minute and then go and do it the next because ultimately it then makes businesses doubt everything that you say about your energy policy and your industrial policy going forward because your word can't be trusted you know you're telling me that you won't do this one minute and then you go and do it the next you know that's not the sort of narrative that you really you know if you're a business and you're going to be investing billions of pounds into an economy that you want to hear from the political leaders of the day so in any case digressing slightly cable big big resistance around about 126 2030 we have we have edged higher posted a higher 67 today I really want to see a move back to 128 30 and then a move through 128 30 to signal a potential basis in certainly on the daily candle the picture is encouraging on that basis so I would certainly argue that we could well go all the way back to 131 over the course of the next few weeks but for now I think we have potentially found a little bit of a base and the big question is now how much can we rally because certainly think in the wider context of things this week's events have made more rate hikes much more likely from the Bank of England that should be sterling positive and that's really reflected in the way euro sterling has behaved over the course of the past couple of days we struggled to get much above 86 now that's not to say that we won't see another test of it but ultimately we're still in the same range we've been we've always been in for most of this year between 82 and 86 and I think that's unlikely to change in the short to medium term so I would continue to play that particular range for the foreseeable future what else have we got we've also got we've got the services PMIs I mean to be quite honest those are a waste of space given the concerns about rising input costs rising inflation disruptions to supply chains I'm actually surprised that they're as positive as they are they certainly don't give a very very accurate reflection of where the economies are if you look at say for example the flash PMIs that we saw from Germany France in the UK we saw a big fall in the UK services PMI to 51.8 well that's not surprising given the tax rises that we saw in April May the May services PMI fell from 58 to 51.8 is a really big fall hopefully this week's events will see a little bit more confidence see back in over the course of the rest of the quarter we've also got UK lending data net consumer credit has recovered after a slow start that's due on the 30th that's on the Monday look to see whether or not there's going to be a little bit of a recovery in that we've also got the Bank of Canada rate decision and we're expecting a 50 basis point rate hike here why simply because Canadian economy is doing well inflation rose CPI froze to its highest levels since 1990 in week in numbers released earlier this month 6.8 percent unemployment is low at 5.2 percent so the Bank of England is likely the Bank of England Bank of Canada is likely to get out in front of the Federal Reserve by hiking its policy rate from 1 percent to 1.5 percent now there's an outside chance they might go 75 I would be surprised if they did but with all the discussions going on about where the neutral rate is you do sort of have to question whether or not they will go any harder than 50 basis points even though there has been talk of the Federal Reserve might start to look at 75 basis points in over the course of the next couple of months the main number for the week is non-farm payrolls and I think the key takeaway for that is not so much the resilience of the labour market we know that's pretty strong I don't think that's going to change 428,000 new jobs were added in April the March number was advised lower to 428,000 so we got a nice bit of symmetry on March and April jobs numbers average hourly earnings remain steady at 5.5 percent now I find that a little bit counterintuitive why because inflation is high and there's 11.1 million vacancies in the US economy and you've got an unemployment rate at 3.5 percent so neither of these numbers are expected to move the dial that much when it comes to monetary policy it's wages growth it is likely to offer clues as to whether or not there is starting to see we are starting to see increasing price pressures starting to build up in the wake of very high inflation now they're around about 5.5 percent average hourly earnings in the US that seems that feels like they should be an awful lot higher given the number of vacancies they're not so I think in terms of the wages numbers we want to see these holding up or even actually rising and the mystery is why that's not happening now I'm looking at the estimates the moment for US wages growth for next week's main numbers and to say that I'm surprised is an understatement markets are pricing in a fall to 5.2 percent so that just completely runs completely at odds to what I would think should be happening when it comes to wage growth so we'll see whether or not that plays out but we don't want to see we don't really want to see a weaker number there and if we do get a weaker number then obviously that's potentially going to be dollar negative going forward so that's payrolls due on the 3rd of June there won't be a payrolls webinar due to it being the Queen's Platinum Jubilee and we're having a street party so I'll probably be out toasting her mage but in terms of earnings announcements next week there's only a couple that really caught my eye B&M European retail is a discount retailer here in the UK has seen a little bit of a recovery in the past couple of days on the back of that budget announcement and hopefully that will arrest some of the declines that we've seen in their retail sector consumer discretionary we've seen a broad mix of numbers obviously we saw those really big misses in the US from Walmart from Target we'll have you but we've seen some fairly decent beats from Dollar Tree Dollar General Nordstrom and Macy's so the US consumer is still out spending money they're probably just being slightly more picky about where they spend it so while things are never as bad as they've seen they're also never as good as they're saying they're sort of somewhere in between so I think when you're trading these markets you basically have to adopt this doctor policy of yeah all doom and gloom on over here okay fine talking your book all sweetness and light over here all good you know nothing is ever as good as it seems but neither is it as bad and I think that's really the the attitude that you really have to adopt having said that looking at B&M European retail it's still done pretty well over the course of the past couple of years and it's still well above its pre-pandemic or post-pandemic first lockdown lows we'll call them that shall we the other one is the M&A that we saw this week Broadcom which is semiconductor to maker done very well from the chip shortage we slip back from the record highs of early this year in much the same as the rest of the sector like its peers in video Intel AMD it's a much more diversified business and they become or I get a set to become even more diversified it makes chips for iPhones industrial equipment it also has a data center business and the software services business so looking at the numbers and its decision to buy VMware cloud company VMware as part of the $61 billion deal in order to diversify its revenue streams even more has seen the company after initial dump over the course of the first part of the week recover an awful lot of those losses and hold above that key support level there so one-and-a-half billion breakclaws in the contract on either side of the deal if they decide to pull out but ultimately I think it's it'll be a fairly a fairly interesting set of numbers and it will certainly be interesting in the context of where they see guidance going forward the fact it's broken below the 200-day moving average is a little bit of a worry and also the fact that it hasn't actually got back above it yet it's hold these lows here we now need to see it get back above the 200-day moving average to reintroduce the uptrend that's been in place over the course of well look at this here over the since since the lows back in March 2020 other companies reporting next week we've got HP first quarter second quarter numbers on the 31st of May and we've got four-year numbers from Dr Martins otherwise that's it for this week ladies and gentlemen once again thank you very much for listening hope you all have a great weekend and but I don't speak to you before I hope you all enjoy the Platinum Jubilee thanks very much for listening