💼 Macro-News round-up

MarketNews

🇬🇧 UK: The UK economy grew by 0.6% in Q1 2024, the strongest growth since Q4 2021 and exceeding all forecasts. This marks an end to the shallow recession entered in the second half of 2023 and a boost for PM Rishi Sunak ahead of an election. Still, the economy remains just 1.7% larger than pre-pandemic levels in late 2019. GDP per capita rose for the first time in two years but remains lower than a year ago, highlighting ongoing living standards squeeze. The Bank of England expects slower 0.2% growth in Q2 as productivity and employment constraints remain.

🏭 The Industrial and manufacturing UK production also came out stronger than expected. It was expected to contract by 0.5% and expanded by 0.2% and 0.3%, respectively.

💱 If the Bank of England finally cuts rates in the coming months, along with a European Central Bank that is on the same line, there will be a divergence in monetary policies with respect to the United States. Money markets are pricing in around 55bps of BoE rate cuts by year-end, 70bps from the ECB, but just 43bps from the Fed which is still grappling with inflation. European bonds could outperform US bonds but volatility may rise as inflation paths remain unpredictable. At the moment, the US 2-year bond pays almost twice as much as the German 2-year bond (4.8% US vs. 2.9% Ger).

🌍 Important. With a strengthening dollar, a euro that will tend to weaken after Europe’s rate cuts, and international markets that remain dollarized, inflation could be a permanent problem for Europe in the medium to long term, as it will tend to make their imports more expensive. UK is less exposed than Europe given its biggest trading partner is the EU rather than global markets, and the Pound is relatively strong against the Euro since the last 5 years, EURGBP 0.86, falling from the 0.94 reached in 2020.

💡 Additional issue: if OPEC+ continues to maintain restrictions on crude oil production. At the moment, Brent Crude Oil rallied slightly to $84.25 per barrel.

📈 The market has definitely resumed its bullish tone in the United States. The SP500 has managed to break the 5200 point barrier, consolidating and currently trading at 5259 points the mini SP500. Remember that we bet on this scenario in last week’s reports, when we said that poor macro data would reaffirm confidence in a more accommodative policy by the Fed. The number of Americans filing initial claims for unemployment benefits rose to 231,000 last week, the highest level since late August 2022. However, remain at very low levels, suggesting the jump in initial claims may not indicate persistent layoffs. Labor market data will be key to maintaining the bullish tone in U.S. equity markets in the coming months.

🇯🇵 Japan: Household spending came in stronger than expected. It rose 1.2% last month, compared to an expected -0.3% contraction. This is likely to fuel risks of persistent inflation. The USDJPY remains strong, currently near 156, trading at 155.70, showing the weakness and doubts about the BoJ’s policy.

🥇 Gold: Once again, gold has risen sharply over the last 24 hours. It is trading at $2,370 per ounce and seems to be moving strongly towards new all-time highs near $2,400 per ounce. Amid geopolitical turmoil and the war in Gaza, but China has played an outsized role in driving the rally this year. With Chinese stock markets weak for the last two years, and the real estate sector at risk, Chinese investors seem to have a clear asset to take refuge in: gold. China’s central bank has also been a major buyer of gold, adding to reserves for 17 straight months to diversify away from US dollar-denominated assets.

🌐 Geopolitics: Chinese President Xi Jinping is visiting Hungary, after stops in France and Serbia. China is a major investor in Hungary and the visit is expected to yield further investments, which are timely as Hungary has missed out on EU funds. Chinese automaker BYD plans to establish its first EV production facility in Hungary, following investments from other Chinese automakers in Europe. The shift to EVs gives Chinese producers an opportunity in the lucrative auto sector as European automakers struggle in the transition.

🌎 However, based on an Euractive article, a European business lobby group said the proportion of European firms ranking China as a top investment destination has hit a record low. Only 13% of firms currently see China as a top investment destination, down from as high as 27% in 2021 and well below pre-pandemic levels. Clearly, there are growing trade tensions between the US, Europe, and China.

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