- Investors Buoyed By Easing Political Threat From Europe;
- UK Services Data Supportive For Rate Hike This Year;
- US PMIs in Focus as Investors Eye Second Quarter Pick Up.
US equity markets are poised to open a little higher again on Tuesday, buoyed again by an apparent easing of political stress in Europe which was weighing on sentiment last week.
Ahead of the G7 meeting, there is plenty to be wary about for investors, most notably the threat of a full blown trade war with Donald Trump having dealt the first blow with tariffs on the European Union, Canada and Mexico. Right now though, investors appear to be taking it in their stride with indices continuing their gradual recovery from the sell-off earlier in the year.
A rally in the pound is weighing on the FTSE early in the European session, leaving it as the only major index in the red, down almost half a percentage point. The sterling gains came on the back of a stronger than expected services PMI report for May, with the survey rising from 52.8 to 54. Better weather and the Royal wedding likely contributed to rebound in what is by far the most important sector for the UK economy but there were other interesting takeaways as well.
Not only did we see an uptick in business activity, which will be welcomed after a tough first quarter that was severely hampered by bad weather, but there was also mention of companies having to pay higher salaries due to a lack of skilled staff. This will be music to the ears of Bank of England policy makers who are clearly intent on raising interest rates this year, despite having pushed it back in May after the first quarter slowdown.
It wasn’t all good news though, with businesses citing Brexit uncertainty as being responsible for lower levels of spending, something that will likely continue to weigh this year until we have more clarity on the future relationship with the EU. The BoE will still likely push on with raising interest rates regardless of this, assuming negotiations don’t collapse, which is why we’re seeing such positive moves in the pound this morning. The inverse relationship with the FTSE 100 due to the amount of profits generated abroad for companies in the index is why we’re seeing such a negative response here.
We’ll also get survey’s from the US today with the Markit Services and ISM non-manufacturing PMIs both being released. As with the UK, the services sector is a huge component of the US economy and investors are looking for further evidence that the country continues to perform strongly and is coping with a rising interest rate environment. Growth in the first quarter was relatively modest but we’re expecting a strong performance in the March to June period.
