Hot UK inflation dims FTSE outlook, weighs on risk assets

Risk sentiment turned negative during the European morning session, with zero- and low-yielding assets taking the brunt of the sell-off as bond yields continued to extend their recovery. Nasdaq futures (-0.8%), Gold (-1.5%), JPY/USD (-0.6%) and Bitcoin (-4%) had all fallen noticeably. It looks like UK's 10%+ CPI reading was the culprit. This has revived worries that interest rates will remain high for longer in the UK – and Europe, hurting the economy, which is probably why oil prices also slid (e.g., WTI being 2 % lower). At the time of writing, our UK 100 index was about 0.5% worse off on the session. The FTSE outlook and risk sentiment in general could sour even more if the upcoming earnings from Corporate America also suggest the US and global economies are weakening more than expected.

Low and zero-yielding assets under perform as yields and dollar rise
Hot UK inflation weighs on risk assets
Netflix starts tech earnings on a negative note

What does it all mean for UK interest rates?

This week’s higher-than-expected UK wage growth and another double-digit inflation print have cemented expectations over another 25-basis point rate hike from the Bank of England next month.

Unlike some other regions in the world where price pressures have eased markedly, UK’s nightmare with inflation continues. It is a tough pill to swallow if you are a member of the Monetary Policy Committee at the Bank of England. A lot of fingers will be pointed towards Governor Bailey. Critics would argue he was too slow to respond to the emerging inflation threat last year and that mistake continues to threaten his and BoE’s credibility. By taking their sweet time in raising interest rates, the MPC will now have to over-correct with further rate rises than they were previously planning. This is of course the last thing the economy needs right now, with household incomes being squeezed due to the cost-of-living crisis. Little wonder why everyone is going on strike.

The sticky inflation means workers will continue to demand for higher pay, putting pressure on businesses as well as government finances and services. We already saw some evidence of this in Tuesday’s employment report which showed nominal wages in the UK grew more than expected.

How bad was UK’s inflation data?

In short, super-bad. Headline CPI came in at double digits for the 7th consecutive month. While the 10.1% print for March was lower than 10.4% recorded the month before, it was still well above expectations. Core CPI inflation was also stronger than forecast, remaining unchanged at 6.2% and defying expectations of a fall to 6%. The pound rose initially although the GBP/USD pair later relinquished its gains as risk sentiment soured.

Wage-price spiral

The persistency of price and wage growth is raising serious concern that wages and prices are feeding on each other over a sustained period. This wage-price spiral is raising fears that inflation expectations might become unanchored.

Focus turns to US techs earnings

Netflix produced results than were not very good last night, causing its shares to drop sharply in afterhours trading. US technology sector earnings will kick off in earnest with Tesla set to follow tonight. Microsoft, Alphabet, Amazon, and Meta are scheduled to post their numbers next week, followed by Apple in early May. These results will have an impact on the S&P 500, as well as the other major indices.

FTSE outlook: UK index stalls at key resistance

The hot UK inflation data has weighed on the FTSE, although given that the index is most comprised of banks, miners and multinational corporations, it tends to be less sensitive to UK inflation data than for example the Nasdaq is to US inflation data. For now, it is finding resistance around 7900 which was also a major high it has formed previously (in 2018). So, there is a risk we could see some weakness here for a while, especially if the upcoming earnings from Corporate America also suggest the US and global economies are weakening more than expected.

Source: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.