Markets impacted by Middle East tensions

OVERNIGHT

Most Asia-Pacific equity markets have fallen this morning seemingly prompted by renewed concerns about an escalation of Middle East tensions. Gold prices rose in response as did ‘safe haven’ currencies such as the US dollar, Swiss franc and Japanese yen. The oil price initially rose with Brent crude moving back above $90bbl but it has subsequently dropped back below $89bbl and is still below its level at the start of the week.

THE DAY AHEAD

Just released UK retail sales data showed no change overall in March and a 0.3% monthly fall in ex-fuel sales. The outturn was weaker than had been generally expected but close to our own forecast for a small drop. Other unofficial reports had suggested sales had risen in March but that was probably in part due to an early Easter effect for which the official data are seasonally adjusted. Activity may also have been dampened by wet weather during the month.

Despite today’s outturn, retail sales will still have made a positive contribution to GDP growth in Q1 following rises in both January and February which should have helped drive an early rebound from recession. Moreover, some fundamentals for consumer spending are now improving as wages are rising more quickly than inflation and consumer confidence appears to be picking up. Next Friday’s GfK consumer confidence update for April will provide the next indication of whether that continues to be the case.

Today’s economic calendar is light with no data releases of note. However, further potentially market moving comments from central bank policymakers are expected as the IMF’s semi-annual conference reaches its conclusion.

Bank of England officials Ramsden and external Monetary Policy Committee member Mann are both scheduled to speak today. Mann is widely considered to be the most hawkish member of the BoE’s interest rate-setting Committee and seems unlikely to be ready to vote for a rate cut in the near future. However, Ramsden – who is one of the five internal members – may be closer to favouring such a move and so it will be interesting to see if has anything new to say about that today. He is appearing as part of a panel session on monetary policy responses to the post-pandemic inflation. Other speakers scheduled today include Goolsbee from the US Federal Reserve and the European Central Bank’s Nagel.

MARKETS

Bond yields in the US rose yesterday following further comments from Fed officials suggesting that they are to hold off from cutting interest rates for now. However, yields have subsequently fallen back overnight. UK gilt yields also posted a modest rise yesterday. The Fed comments prompted an appreciation in the US dollar against both the euro and sterling yesterday and that move seems to have been given further impetus by today’s geopolitical developments.