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The Early

26 May 2017 07:18

Markets: not cutting enough?

As expected, OPEC producers agreed to extend the current planned schedule of production cuts by nine months to March next year, with non-OPEC nations, led by Russia, matching those commitments. The crude price fell back during the European trading session as some market participants had anticipated deeper and/or longer cuts. There are now fears that a continued rebuild in US production will offset the cuts and cap the recent rally in crude prices.

Despite the drag from the energy group which ended lower by -1.16%, the Euro Stoxx index closed flat as utilities +0.48% and telecoms +0.35% topped the daily performance table.

Softness in the oil & gas majors -0.94% also weighed on the UK but was partly offset by the boost from a weaker pound. Transport +1.21%, financial services +1.19% and tobacco +0.96% all featured among the winners. Trading volumes remain subdued but that did not prevent the Mid 250 from hitting another new high, a fraction below 20k, led by a couple of big single stock moves (ICP +14%, WIZZ +13%). Retail +1.23% and media +1.13% paced our PHySiCS sector movers.
Our May UK earnings revisions update is published separately today. The UK reporting season for CY2016 final results may be over, but the message from the bottom-up trading news across the UK equity market remains largely encouraging. There was a further improvement in the EPS revisions ratio through May as forecast upgrades remained in the majority across the size benchmarks.

Overnight. A better day for the US retail sector helped the main equity indices to new all-time highs; consumer discretionary +0.93% led the way and the VIX slipped to a two-week low. Sterling was under renewed pressure as the latest YouGov poll showed the Conservatives' lead down to just 5%. The -5% decline in crude weighed on Asian equities and European opening calls are flat.

Early numbers. Dow +0.34%, S&P +0.44%, NASDAQ +0.69%, VIX 9.99; US 10yr 2.25%; Nikkei -0.62%, Hang Seng -0.04%, Shanghai Comp +0.02%; £=$1.2885, £=€1.1500, Brent $51.20/bbl, Gold $1257.81; FTSE 100 indication -1 (at 6.30 UK).

Macro: over the worst

The downgrade to UK growth included in the second estimate of Q1 GDP was unexpected, but should soon be forgotten if the survey evidence proves accurate in predicting a rebound in Q2. The deceleration to an expansion of just +0.2% QoQ was entirely due to a weakening services sector, and the expenditure split illustrated the extent to which consumer spending has slowed in response to the squeeze on real wage growth. The contribution from the external account is also superficially disappointing: net trade subtracted -1.4% from growth in Q1, offsetting a similar positive contribution in Q4. The big swing primarily reflects volatile components (notably gold), and recent measures of export optimism hold out more hope for a better performance in Q2, as the benefits of a more competitive currency become more evident. The +0.6% QoQ expansion in business investment is more encouraging, suggesting Brexit uncertainty is not weighing too heavily on the corporate sector's expansion plans.

The US goods trade deficit widened to -$67.6bn in April as exports fell. Combined with a reported decline in wholesales and retail inventories last month, that is likely to prompt further reductions to Q2 GDP growth estimates. 

The +0.3% MoM rise in Japanese core CPI last month was entirely due to higher energy prices; underlying prices remained flat.

Today's events. US Apr core durable goods orders (1.30) +0.5% MoM, non-defense ex-aircraft +0.5% MoM; US May Michigan consumer sentiment (3.0) 97.5.

Ian Williams
Economics & Strategy
020 7418 8819
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