 Good morning, welcome to CMC markets on Friday the 10th of June and this quick look at the week ahead beginning the 13th of June with me Michael Houston, I think one of the key concerns that investors have had this week has been inflation and If you look back to say two weeks ago, I think there was some optimism that we could well be near a peak As far as US inflation is concerned I think there was always a belief that inflation in Europe was slightly lagging behind But certainly I think as a leading indicator that perhaps there was this perception that US inflation was always Slightly ahead of everything else and certainly in recent numbers. We have started to see some evidence that PPI in particular had started to top out in the US and If you look at the the PCE numbers in the US They've been on the decline since the March peaks But and I think that is I think one of the reasons why we started to see equity markets roll over this week is that Inflation is likely to become a much more persistent As we head towards the end of the year if you cast your mind back to say for example Six months ago at the beginning of this year. I think there was an expectation that while These current inflationary pressures were likely to be high They would probably trail off Fairly quickly towards year-end that is becoming increasingly less likely We've got oil prices back at three months highs above 120 dollars a barrel. We've got talk of food shortages supply chain Problems and obviously the we've also got China Well second biggest economy there was some early optimism on Monday that the loosening of COVID restrictions in Shanghai and Beijing might prompt a fairly decent rebound and economic activity and certainly I think in the context of April the main numbers should show an improvement when it comes to retail sales and industrial production but The fact of the matter is China zero COVID policy will mean that we won't get a V-shaped rebound in the Chinese economy within two days of These restrictions being relaxed. There's been reports that We're getting isolated COVID cases in Shanghai prompting new lockdowns So I think any China recovery is going to be very stop-start in nature. It's going to be very difficult to determine a Clear trajectory for a recovery Unless or until China drops its zero COVID policy and at the moment that doesn't look likely given the low vaccination rates amongst its population So where does that leave us? Well, certainly in terms of US 10 year yields We've rebounded off the 50-day moving average and we're now back above 3% Now that doesn't necessarily mean that we're probably going to go back above the highs But certainly the direction of travel here Shows that we're probably at risk of more upside than we are downside If we want to have confidence The top is in for inflation We need to see a break of this key support area here as well as the 50-day moving average And that doesn't look very likely if we look at the dollar index. It doesn't look dissimilar We've seen a fairly decent rebound over the course of the past few days again of The 50-day moving average I think one other thing that has shifted over the course of the past two weeks is the willingness of central banks to Deliver outsized rate hikes. So we've seen the Bank of Canada Embark on a 50 basis point rate hike last week with the intention that they're probably going to do more We've seen the RBA this week follow suit with a 50 basis point rate hike of its own with again the Expectation that they're probably going to deliver more and let's not forget the the the RBA is behind the curve Pretty much like the European Central Bank, which yesterday Indicated that it intends to move its headline rate Up by 25 basis points in July with the potential for another 50 basis points in September We could get 25 in September. It really depends. I think on the overall Stickiness or otherwise of headline inflation, you know, and if you look at headline inflation rates CPI rates in The euro area. Yes, the headline rate for a year is 8.1, but in places like Lithuania And it's an Estonia. It's above 16 17 18% and yet in France is a 5.4 so It was very telling that Christine Lagarde was asked a question about where the ECB saw the neutral rate for Inflation well, I suppose that really depends on where you are in Europe because the neutral rate is going to be a lot higher in the Baltic states Then it is and say somewhere like France or Germany. So That I think encapsulates the big the big challenge That the ECB faces when it looks to raise interest rates or when it starts to raise Interest rates and is reflected. I think most starkly in this chart here Which is a spread between Italian tenure yields and German tenure yields and the ECB won't want to see this graph here Go back to the levels that we saw back in 2018. That is the spread between the 10-year Bund and the 10-year BTP and 10-year BTP rates are 223 basis points above German rates and the ECB won't want to see that blow out and they call that fragmentation risk fragmentation between 10-year yields across the bond curve and that in itself is going to present enormous challenges for the ECB Going forward and that's why Euro sold off quite aggressively yesterday. So If we look at the euro dollar We look at the down if we look at the daily chart that I've drawn here We can see that we did try and break that trend line from the highs this year We briefly broke above it, but we weren't able to get back above this 107 70 80 level and we've drifted back down again so the challenge I think for the moment is all the The bias for the moment is for further euro weakness and for further dollar strength to really undermine that If we look at say for example the dollar index and we look at the euro dollar We need to see correlation between the two. We need to see a break above 107 80 108 on The euro to suggest that we've got a short-term base in the bigger bigger level on on this particular chart That's 103 40. So I think while we're below 108 the bias remains for Euro weakness and further dollar strength on a charting basis In terms of the pound pound certainly facing its challenges over the course of the next few days It's been trading in this window here on this chart with a very big barrier around about 126 50 day moving average is also acting as a fairly decent cap on that But it is finding a fair degree supported around about the one twenty four and a half one twenty four twenty area So we need to see where and how that Breaks out over the course of the next few days and weeks But certainly I think bearish bets and pessimism over the pound is starting to become the overriding narrative when it comes to listening to people Talk about the direction of travel for the pound and in my experience when people get start getting overly negative on sterling That's the time to buy it peak bearishness I call it and generally it tends to be fairly reliable If we look at euro sterling, that's pretty much a snooze fest Like watching paint dry. We are still very much Cat to the round 86 That remains the key resistance level with fairly decent supported around about 84 and a half But we remain very much in a range for that and I really don't see I don't see really much indication that we're going to break out of that range when you look at the euro and you look at sterling It's really trying to make a choice between two drunks at a bar neither a particularly Attractive, but if you have to choose one you tend to chop and change between one and the other Certainly in terms of the footsie 100 again here. We found very very difficult To break above seven thousand six hundred and we are now slipping back down to The mid part of that range 7400 we've dipped below that we could get back to as low as seven thousand two hundred But at the moment in terms of value if you're going to be long of any index Then it's really the footsie 100 you have to be long of because it's very much a value index as opposed to a Growth index of which you find the DAX is rolled over We did break above this trend line here. I've now removed it We weren't able to consolidate back above fourteen thousand eight hundred. That's the next key resistance level for The DAX and we could we'll see a retail we could see a test down towards this trend line here Which currently comes in around about thirteen thousand seven hundred thirteen thousand eight hundred So certainly I think the bias at the moment is for a little bit of a return to the lows of The recent range the S&P We tried it to I've drawn some new fib lines in here So bear with me I've taken the highs of January this year taken the lows of last month and we've retraced around about thirty eight point two percent of that Also got the 50 day moving average Which looks as if it could well as act as a resistance level as well So I think there's a good chance we could see a revisit of the lows and around about 38 turn Certainly, I think this is probably a bear market rally I think we're probably going to see further declines in US markets in the short to medium term Just to sort I think wipe out Some of the optimism that is still round just about there. I think when it comes to Start market direction. I think when you've been buying the dip for ten years solid It's a hard habit to break So we haven't actually as yet Reached peak pessimism that doesn't and I think until we do I think there's a good chance We could see a retest of the lows on the NASDAQ and the S&P and potentially a move Even lower before we find the short-term base certainly the direction of travel Still appears to suggest there's more downside in the short term when it comes to equity markets And I think much will depend on the messaging that we get this coming week from the Federal Reserve on Wednesday The Bank of England on Thursday the Swiss National Bank on Thursday in the Bank of Japan on Friday So it's a big week for central bank decisions and I think a Large part of the market direction could be determined from the messaging that we get from those central banks We've also got Chinese retail sales for May On the 15th of June And I think it's fair to say the last two to three months have been difficult ones for the Chinese consumer Covid restrictions lockdown measures As Chinese authorities fight a losing battle to implement their zero Covid strategy and it is a zero It is a losing battle. You will never Be able to completely eliminate The Omicron variant or the variants of Omicron that are currently affecting Chinese population The Chinese growth target for this year still remains a five and a half percent That is big that one. I mean that was optimistic a month ago It's looking even less likely now in March retail sales in China declined by three and a half percent And in April we saw another steep decline of minus eleven point one percent And that was bigger than the minus six point six percent decline that was expected Industrial production also slowed sharply Falling two point nine percent in April as well. Now we could expect to see an improvement in May simply because When the world while the Chinese economy grounds will hold in April there was some relaxation of restrictions in May And that should be reflected in the overall numbers Nonetheless, we're still expecting to see a decline in retail sales for May of around about seven percent And as I outlined earlier, I think it's highly unlikely we'll get a v-shaped rebound When it comes to the Chinese economy on the basis that if you have stop-start measures when it comes to Easing restrictions, then you'll get a stop-start economy now. We have seen a softening in Chinese inflation In May that came in below expectations inside of PPI But that's not really altogether surprising because you've got demand destruction people can't go out and buy stuff if they're stuck indoors, so I think part of that weakness in inflation is likely to be as a consequence of the fact that People haven't been able to go out. They haven't been able to go out and spend money And they haven't been able to go out by good services eat out or do anything that they would really want to do Over the course of the past few weeks So I think when we look at the Chinese economy q2 is likely to be You know and even in a very very weak quarter and I would be very surprised if we don't see an economic contraction in q2 Away from China. We've also got wages data for the UK for April And I think that for me is going to be a big deal because I think for several months now People have been concerned about how strong or otherwise wages growth in the UK has been and certainly I think if you look at The March wage numbers average weekly earnings For March wrote rose by seven percent that was including bonuses Excluding bonuses was four point two percent Now in April an awful lot of those rate than all right was all a lot of those salary increases that were basically rolled out by various retailers Started so they will appear in the April numbers. So even though we got a very high inflation number CPI number In April for the UK. We could also see a significant uplift in wages as well as the six percent seven percent eight percent nine percent Pay rises that were rolled out by various retailers Get included in those numbers now at the moment There aren't any sort of there isn't a consensus for what that number might be as Just as a reminder In March weekly earnings excluding bonuses were four point two percent I will be very surprised if we don't see a number in the region of five for that particular number when the April numbers are released on The Tuesday the 14th of June Unemployment is still very low at three point seven percent. And I think that's another reason why Central banks will feel emboldened to be much more hawkish when it comes to raising interest rates and I think that sort of brings me on to This week's Fed meeting and the Bank of England meeting, which I'm really going to focus on more than anything else So we're going to get 50 basis points this week to one and a half percent And we're going to get 50 basis points in July and as a good chance We could get 50 basis points in September as well if the data warrant it What warrants it? Also the bomb buying know the balance sheet reduction program has also started this month with 47 and a half billion Dollar, so the Fed is now actively reducing the start of its The size of its balance sheet starting this month and that will rise to 95 billion dollars a month Yet by September Now, I think the bigger the bigger question here is not so much about What the Fed do or don't do? When it comes to this week, we know they're going to do 50 basis points is what they do with their inflation Forecasts and their growth forecasts so that will be The the key component for me So as a reminder in March the FOMC upgraded their inflation forecast for 2022 To 4.3 percent from 2.6 percent So it's currently 4.3 and in 2023 they upgraded to 2.7 percent from 2.3 Well downgrading GDP to 2.8 in 2022 So 2.8 is the GDP forecast for this year from the March projections and 4.3 percent is the inflation projection from March This inflation get adjusted up probably will big question is by how much and how much Will they downgrade their GDP? Forecast and I think a lot of that could determine how the markets react to this week's Fed policy statement We've also got US retail sales for May Which are also due on the 15th the same day as well And on that score the US consumers actually been doing pretty pretty okay We've seen retail sales growth in every single month this year I think the main numbers could be the weakest number this year Given the fact that we are seeing consumer confidence still at very very low levels and The US consumer has also gone on a borrowing binge over the course of the past three months To the tune of around about 40 billion dollars a month So that I think that's a concern going forward So it'll be interesting to see how that is reflected in the May retail sales numbers As well on top of the Chinese retail sales numbers. So So that's the Fed Now we have the Bank of England as well. Now the Bank of England's Yeah, I mean my my views on the Bank of England no secret I think they've been absolutely rubbish when it comes to forward guidance The fact that Andrew Bailey Actually came out and said that there's little this central bank can do about supply chain problems while true It's not something the central bank should be openly admitting, you know Throwing their arms up in the inside in the air and saying, you know, there's nothing we can do We're helpless, you know, try and show an element of competence when it comes to setting monetary policy Now the expectation is we could we'll see a 25 basis point rate hike this week at the very least Unfortunately for The Bank of England it tends to lack the Cajones if you like to do more than 25 basis points even though we did have three members vote for a 50 basis point rate hike at the last meeting central bank needs to do something about the inflationary impulse that's been caused by the weakness in the pound over the course of The past year or so if you look at where the pound is now it's at 124, but look at where it was You know, look at where it was this time last year, you know, it was at 140 So that in itself has exacerbated the inflationary impulse into the economy given the fact that commodities are all priced in dollars And we import an awful lot from From abroad so there has been an inflationary impulse caused by the fact that an awful lot of our We import an awful lot of stuff So that needs to be they need to give an indication that they're prepared to really get ahead of the inflation narrative and try and tamp down on it Now whether that will support the pound or not is another matter, but certainly I think they need to try and at least keep track of the Fed or You know at least hang on to the Fed's coattails And you know and the argument is well that will impact growth You know that will impact the economy were already at stake inflation and so on and so forth You know, what do you think inflation is doing to the economy if not strangling the life out of it? You know, so you get the damned if they do and the damned if they don't but what they don't want is The pound to fall below 120 and head towards one one fifteen 110 that is the last thing we want to see so giving the air of a certain amount of competence would be a start and Certainly, I think 25 basis points at the very least But they need to be I think much less dovish and focus on their core mandate Which is basically inflation at 2% that is their core mandate. That is what they're employed to do so What you know, whatever that means for the pound I think the Bank of England will do what it normally does and do pretty much the very least and And Then the bigger question will be how many more rate hikes can we expect to see? By the end of the year, but certainly I think that they need to hike The base rate the base rate needs to at least double from where it is now So we need to see something in the region of a base rate of around 2% By the end of the year, of course that won't happen, but you never know Anyway, I'm digressing ever so slightly so the Bank of England Rate meeting. We've also got the Swiss National Bank We've got the Bank of Japan which brings me neatly on to dolly in because we're back Almost within touching distance of 135 dolly in the Bank of Japan has got a big problem because the decline in the end has brought it back to levels last seen in 2002 when it hits 135 and only this morning We've had a statement from the Ministry of Finance as well as the Bank of Japan Are they are concerned about the decline in the value of the end? Well, I mean, it's not really a surprise if you come out and basically say that Your monetary policy bias is for lower rates not higher rates So be very interested to see what sort of pivot if there is any by the Bank of Japan certainly inflation in Japan is Still very low. It's two and a half percent In April or rose to an opposite in April. It was at 0.5% in January The decline in the end of 13% is likely to exist but exacerbate a Significant inflation reimpulse into the Japanese economy at the moment It doesn't appear to be reflected in the headline CPI numbers even though PPI is around about nine and a half ten percent So be interested to see what sort of narrative the Bank of Japan comes out With in the coming few days, whether or not they decide to go down the intervention route or whether they just they just Settle for jaw-boning the yen higher and The dollar lower I think much will depend on what happens to equity markets when it comes to that in terms of The overall numbers looking at Brent crude here These are obviously the highs that we saw in March We're below one twenty six and a half. I think that's going to be a significant Resistance level, but at the moment the direction of travel for crude oil Doesn't look particularly promising if we're looking for lower Fuel prices and on the earnings front. It's been a Significantly challenging week for retailers this week declining consumer confidence some of the retail sales numbers that we've seen Over the course of the past week or so have shown weak consumption patterns Consumers are issuing More expensive household items furniture and what have you for cheaper items We've heard we've heard profit warnings from Target this week in the US Too much higher margin inventory, which they can't get rid of and they're looking to focus on Some of the low margin stuff and it's not surprising that people are prioritizing food over pretty much anything else So yeah, that's why when we see Tesco's numbers Which are due Which are due on the 17th their first quarter numbers will be interested to see what consumption trends Tesco's come out with certainly I think in terms of the share price movement that we've seen over the course of the past Few few months there. I think there is can significant concern about margins as costs For doing business go up fuel costs logistic cost delivery costs Given the current costs of petrol that's going to be a significant. It's going to have a significant impact To an awful lot of retailers Tesco's has already pledged to increase Wages staff wages in its efforts to retain the service levels. It's raised salaries by six percent Rising fuel prices are likely to increase the cost and maintaining delivery and logistics Cost saving measures will go some way to mitigating that but they're not going to mitigate all of it So that's a big challenge for Tesco's JD sports There is an expectation at some point JD sports will issue its full year numbers at the moment There's not a drug dead day for that It could be some time this week. They've been in the news for all the wrong reasons. They'll find five million pound by the CMA For breaching an order that barred it from further integrating foot asylum into its business Last week it also Got fined another two million quid for Anti-competitive behavior when it came to the sale of Glasgow regions Glasgow Rangers merchandising So and the departure of its chairman Peter Calgill has also Seen significant amount of weakness in the share price recently not back to the lows that we saw in 2020 But certainly I think there's a concern about margins not only in its UK operations, but also in its US Operations and we've also got boohoo Fast fashion fast fashion is falling out of favor. Well, obviously the headlines with respect to misguided The fact that fast fashion isn't particularly environmentally friendly Has been has hurt the share prices of companies like boohoo and ASOS obviously misguided went bust I don't think there's any chance that boohoo will do that But certainly I think in the context of where we could go to next The big the big level on boohoo share price is the lows that we saw earlier this year on the 8th of March It seems to be very much a case of a dead cat bounce when it comes to boohoo's margins For this year boohoo saying that it hopes to consolidate its market share gains And expect to see revenue growth in the low single digits and adjust a d-bit dial margins between four and seven percent As it looks to raise its prices to convert the erosion in its margin Certainly, I think the collapse of some of its closest competitors will help in that Whether of course or not it will be enough remains to be seen So I think that's pretty much it for this week ladies and gentlemen once again Thank you very much for listening. I hope you all have a great weekend and I'll speak to you all same time same place Next week. Thank you for listening