European stocks edge higher, BoE meeting ahead

Morning Note

Stocks seem to be largely marking time until there is more clarity on economic data like inflation with the major European bourses a little higher this morning but well within ranges. Bonds are steady with US 10s around 1.5% and stocks are likely to remain similarly directionless until the former start to motor. Wednesday saw US indices essentially flat but they remain +1% higher on the week after a sharp turnaround from the Fed-induced selling last week. The Nasdaq rose marginally to notch another record high with subdued bond yields allowing investors to get back into big tech growth. More Fed speakers today to watch for in the shape of Bostic, Harker, Williams, Bullard and Barkin but the sentiment seems to be that if the Fed is going to more mindful of inflation than was judged for most of the last year then it ought to keep control of yields and allow for gently rising stock markets. I’d still be mindful of a tantrum later this year when yields ought to pick up some steam. 

 

Sterling trades close to $1.40 ahead of the Bank of England monetary policy statement today. As detailed in our preview, no change is expected but there are signs that inflation might run hotter than the MPC currently forecasts so we will be watching for any commentary around this. Yesterday’s UK PMI report pointed to strong inflationary pressures that will take CPI above the bank’s 2% target – the question is how far above and for how long – and how does the Bank respond. Bailey has made clear the MPC won’t tolerate above-target inflation for long. Could he spring a hawkish surprise today and say something like ‘inflation pressures are building and the bank has the tools to respond’?  I don’t think this is the time yet to do this, but that’s why it would be a surprise.

 

GBPUSD: near term resistance at the 1.40 round number, support holding on the 100-day line at 1.3950.

WTI made a fresh high above $74 amid ongoing expectations that restrained supply and improving demand is leading to an increasingly tight crude market. Yesterday the EIA reported crude oil stocks declined by 7.6m. Stocks at the Cushing, Oklahoma hub fell to their lowest since March 2020 and US total petroleum demand rose 20.75m bpd, getting close to pre-pandemic levels. Meanwhile OPEC is signalling a stronger oil market. Chatter is that the cartel will increase production by 500,000 bpd from August as they continue to cautiously unwind production curbs. 

 

Copper has staged a bit of comeback this week but there are some bearish indicators on the physical supply front with China releasing metal from reserves to counter rising inflation. Wednesday saw a bounce in copper as the release of 100,000 tonnes of base metals was less than expected, but this is being reversed. Import demand in the country is also reported to be the weakest since 2017, whilst LME stockpiles are 30% higher this month.  

 

Bitcoin futures just running into resistance at the 200-day line, which had acted as support during recent plunges.