- Risk ON as European stock indices open higher
- Crude oil rebounds, cryptos rise and dollar mixed
- Strong data outweighs concerns over rising yields
- UK socks outperform with Chancellor Rishi Sunak to present Budget at 12:30 GMT
- Thing to watch out for in the Budget
The markets have been all over the place for the past few days, alternating between “risk-on” and “risk-off” as investors have tried to weigh the impact of rising yields against the prospects of a strong economic rebound with the ongoing COVID vaccine rollouts. Today, it was back to being "risk on," even though concerns over valuations and rising bond yields are still there. Stocks were higher in Europe, led by the UK’s FTSE 250. Crude oil was higher after a 3-day drop. Bitcoin was up 6% after reclaiming the $50K handle. In FX, the dollar was mixed with other haven currencies – the Swiss franc and Japanese yen – being weaker. UK shares were outperforming ahead of Chancellor Rishi Sunak’s budget announcement, with investors happy to hear that he would extend furlough pay for workers.
Should investors be too concerned about yields?
At current levels, real and indeed nominal bond yields are still quite low relative to historical levels. Central banks are continuing to ‘print’ at full throttle. So, we are still in expansionary monetary policy phase. Obviously, bond purchases will be tapered by central banks as the recovery takes shape. But for as long as they are not withdrawn very quickly and interest rates are not hiked too soon, this should keep the bulls happy. If anything, rising bond yields point to a stronger global economy.
Stronger data provides encouragement
Indeed, it looks like investors are being encouraged by signs that the pandemic-hit global economy will bounce back strongly and that this will help boost future corporate earnings, reducing the need to just rely on central bank and government support.
Fresh data revealed the Australian economy maintained its rapid recovery in the final three months of 2020 with GDP expanding by 3.1% vs. 2.5% expected, following an above-forecast growth of 3.4% in Q3. The Eurozone final services PMI was unexpectedly revised higher by 1 whole point, albeit it still remained deep in the contractionary territory at 45.7. The latest PMI reading from Italy also beat expectations.
UK stocks, pound outperform ahead of Budget 2021 announcement
But after opening sharply higher, stock indices eased off their best levels as we approached mid-day in Europe. UK shares were leading the gains in Europe, with the domestically-focused FTSE 250 being up 1.3% at the time of writing, outperforming the FTSE (1.1%) and mainland European indices (which rose between 0.5 to 1.0 percent).
What to expect from the UK Budget?
Rishi Sunak will reveal a wide range of measures to support the recovery, some of which have already been leaked. Tax hikes are necessary to help pay for the vast government support. But who will shoulder the tax hikes is the key question?
- Corporation tax - Sunak is expected to announce plans to raise corporation tax to between 23 and 25, from 19 percent currently. But the increase could be delayed until early 2022 to avoid chocking growth, just as lockdowns are about to end.
- Income tax - Sunak is not expected to increase income taxes and likely to freeze the £12,500 threshold above which people start paying income tax. The £50,000 threshold above which people pay 40% is also likely to be frozen.
- Furlough scheme is expected to be extended until September, with the government covering 80% of wages for works impacted by the pandemic until the end of June, up to a maximum of £2,500 a month. The support reduces from that point.
- Self-employment grants will continue at the same terms. The grant for February, March and April will see the Government cover 80% of monthly profits up to a maximum of £2,500 a month.
- "Help To Buy" is another announcement likely to garner the attention as the government tries to help people get on the property ladder with a deposit of just 5%. Meanwhile, there will likely be an extension to the stamp duty freeze for another 3 months. This will results in an additional 300,000 property sales in England, according to Rightmove.
The Office for Budget Responsibility will publish its latest forecasts for the UK economy and public finances later this afternoon after the Chancellor’s Budget speech.
Ahead of the UK budget announcement, the FTSE was testing resistance around 6700/10 area:
Source: ThinkMarkets and TradingView.com
The index needs to break above the short-term bearish trend line to ignite fresh technical buying after holding its own above the key support at 6515 earlier in the week.
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