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Daily Wrap Up 06 June 2022

6 Jun 2022 04:30 PM

Equities gain, sterling steady ahead of Johnson vote

Last Friday’s well received US non-farm payrolls report is still influencing the markets as European and US stocks are showing strong gains. The update confirmed that 390,000 jobs were added in May, which easily topped the 325,000 forecast. Economists were expecting the unemployment rate to fall to 3.5%, but it held steady at 3.6% - its lowest level in over two years. On an annual basis, average wages grew by 5.2%, which is a respectable level, but keep in mind that CPI is 8.3%. A few weeks ago, the minutes from the May Fed meeting were published, and they were not as hawkish as originally feared. The US jobs report was good but not great so overall the message is that the US economy is improving, and therefore we can expect further rate hikes, but the announcement was not so hot that traders are anticipating multiple 50 basis point hikes. Even though US stocks are higher, the S&P 500 has not retested the peak posted last week. The DAX hit its highest mark since late March and that underlines the bullish mood in Germany, even though there is speculation the European Central Bank will hike rates in July. Bank of America now predicts the ECB will hike rates by 150 basis points in 2022, while previously they forecasted an increase of 100 basis points.

The UK Prime Minister, Boris Johnson, will face a vote of no confidence later. There is speculation that a large portion of Conservative MPs are looking to oust him, but the currency market is pricing-in the Prime Minister keeping his job as the British pound is higher versus the euro, the US dollar, and the Swiss franc. It is worth noting that sterling was in rude health on the run up to the UK’s EU referendum, so markets are not perfect when it comes to predicting political outcomes. The Japanese yen is in the red as the overall optimistic mood in the markets has impacted demand for risk-off assets such as the yen. Things have gotten so bad for the yen, it dropped to a new 20-year low versus the US dollar.

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