Daily Market Update: Risk appetite improves but political developments are being closely watched
Risk appetite returned to financial markets yesterday with equity markets and the oil price posting strong gains.
The Euro Stoxx index of the Eurozone’s top 50 blue‐chip companies rose 2.6% yesterday. Wall Street’s S&P 500 notched up its third successive session of gains with a 1.7% gain at yesterday’s closing bell. This positive sentiment has continued overnight in Asia. Chinese stocks have risen to a two‐week high and the Japanese Nikkei 225 closed some 2.3% higher earlier this morning. However, European equities are retreating from yesterday’s gains in early trading this morning.
Politics rather than UK economic data will be the focus of attention within financial markets over the next 24‐48 hours. David Cameron heads to Brussels today with hopes of finishing off seven months of negotiations on new European Union membership terms. The UK Prime Minister hopes that a deal by tomorrow will then signal the start of a four‐month referendum campaign with a vote being held in late June.
Outside of the equity markets there were strong gains in the oil price. A barrel of Brent crude oil is trading almost 8% higher this morning at $34.6. This compares with $32pb. It follows more talk of oil producers cutting back production. On the currency markets sterling has adopted a firmer tone over the last 24 hours. Cable is back above $1.43 having opened at oil$1.4260 yesterday. Meanwhile EUR/GBP is back below 78p at 77.7p as I write. EUR/USD has fallen from $1.117 to $1.114 over the last 24 hours.
Yesterday’s UK labour market data was somewhat mixed. From a jobs perspective it couldn’t be better. Once again the employment rate, defined as the percentage of the working age population in employment, hit another record high of 74.1%. The number of people in employment increased by 205k in Q4 2015 although this was below the 225k rise expected by analysts. Meanwhile the number of people classed as unemployed fell by 60k in Q4 with the unemployment rate remaining unchanged at 5.1%. The latter is in line with the 2000 – 2007 average. The UK economy might be awash with jobs, but it isn’t translating into pay growth.
Wage growth slowed in Q4 to its weakest rate since February. Overall, average earnings growth was just 1.9% last year, slightly less than the 2.2% recorded in 2014. The big difference between these two years is the real value of the increase. Inflation eroded just 0.1% of workers’ purchasing power last year, whereas in 2014 it chewed off 0.9%. That means 2015 was the best year for real wage rises (1.8%) since 2007, but given real pay was actually falling in six of those years it’s hardly a triumph. Low inflation has done workers a service then, but that might not remain the case for long. The Bank of England’s agents report that firms are using the lack of inflation to justify low wage rises. If pay doesn’t pick up then the MPC won’t stand much chance of hitting its 2% inflation target.
Last night’s FOMC minutes revealed that many Federal Reserve policy makers saw increased risks for the US economy following the recent bout of financial market turmoil. Several members argued that it would be “prudent” to wait for more evidence about the underlying strength of the economy and inflation before embarking on any further interest rate rises. Meanwhile one of those FOMC policy makers, St. Louis Fed President Bullard (voter), said recent financial‐market turmoil and a further decline in investors’ expectations for inflation have given the central bank scope to delay interest‐rate increases.
The FOMC minutes followed a mixed set of data releases from the US. There was a rare upside surprise with January’s industrial production data. US industrial production rose by 0.9% m/m in January. This represented the fastest rate of growth in 14 months. The latest housing market data was less impressive with both housing starts and building permits dipping in January. The US will be the main focus for economic data today on an otherwise quiet day in the UK and the Eurozone. The Philly Fed manufacturing survey is the key release of the day but expect plenty of noise from Brussels.