Moves on commodities, higher global bond yields and a strengthening dollar are all key factors on financial markets coming into this week. Risk appetite has improved, at least in so far as the geopolitical risks have subsided somewhat. However sharp moves on markets tend to increase nervousness of investors. We look at the implications for the outlook on forex, equities and commodities markets.
Bank of England Governor Mark Carney justifiably has a reputation of flip-flopping and did little to improve accusations of being an “unreliable boyfriend” last week. In a BBC interview (perhaps meant for a wider audience than financial markets), Carney suggested that people “prepare for a few interest rate hikes over the next few years”. He also cited softer data (inflation and retail sales) in suggesting that a May rate hike was not guaranteed as “there are other meetings over the course of the year”. However, in the March Bank of England meeting, two members (Saunders and McCafferty) dissented in calling for a hike, whilst the minutes noted “the remaining seven MPC members… still believed rates would have to rise faster than the markets are currently anticipating”. Prior to Carney’s comments the market was pricing around 70% to 80% probability of a May hike (i.e. largely priced in), but this has now dropped to c. 40%. However, the cold weather in March that impacted retail sales is likely to be unwound in a far more pleasant April. Furthermore, it was foreign goods driven inflation declines (sterling strength related) that drove CPI lower whilst domestic inflation actually increased from 2.4% to 2.5% last month. The market has been strongly positioned and this is quickly being unwound. However, a hike for May is still in the balance (edging out to August now) and remains possible. Once the dust settles could this be a chance to buy sterling?
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