UK markets: ‘Penny is dropping’ there will be no immediate ceasefire in Ukraine while focus shifts to Sunak’s ‘double whammy’
European markets underwent a subdued start to the week yesterday, with the FTSE100 outperforming on the back of another day of advances for crude oil prices, pushing the index to close at its highest level since 28 February.
“The main reason for the move higher in oil prices was reports that the EU was considering implementing a full-scale embargo on Russian oil later this week, while Ukraine rejected an ultimatum by Russia to surrender the port city of Mariupol or face the consequences,” Michael Hewson, Chief Market Analyst at CMC Markets UK, explained this morning.
“The penny appears to be finally dropping that there is little chance of an imminent breakthrough in so-called ceasefire/peace talks between Ukraine and Russia.”
The DAX found itself on the back foot after the Bundesbank downgraded its outlook for the German economy, for the rest of this year, due to the effect of higher energy prices.
US markets also slid back after Fed chair Jay Powell said that the Federal Reserve wouldn’t hesitate to raise rates by more than 25bps if needed, opening the door to not only 1 hike of 50bps, but several hikes of similar magnitude in order to bring inflation under control.
Powell went on to say that the central bank would act based on how much progress was being made in bringing inflation back to target, and not assume it will come lower all by itself as supply chain concerns decrease.
“Powell’s tone in this regard appears to draw a line under the transitory narrative of six months ago, and suggests the Fed is likely to err on the side of tightening too quickly, rather than by not enough,” Hewson said.
Consequently, US bond yields pushed even higher with the 2-year yield blasting through 2% for the first time since May 2019, while the 10-year yield also moved higher, pushing the spread between the two to the narrowest since March 2020, while the US dollar pushed higher, hitting a six year high against the Japanese yen, and above the 120 level for the first time since February 2016.
“Despite yesterday’s modest decline in US markets, today’s European open is set to be a mixed one, with the only data of note coming from the UK,” Hewson pointed out.
Sunak’s challenges
Today’s UK public sector borrowing numbers are expected to reinforce the narrative that the Chancellor of the Exchequer has room to be “a little generous” when he gets up to deliver his spring statement tomorrow in the House of Commons, he continued.
“Better than expected tax receipts look set to show that borrowing is expected to come in as much as £23bn lower than forecast, a few months ago. Higher than expected tax receipts along with a more resilient UK economy has helped in that regard,” Hewson said.
With soaring energy prices set to more than double energy bills over the next 12 months,
“Rishi Sunak is faced with a double whammy of a slowing economic picture, as well as higher interest rates due to rising inflation, although it’s important to remember the UK isn’t unique in facing this,” Hewson concluded.
Public sector borrowing is expected to show the government borrowed £8.4bn in February, well below the £15.3bn a year ago.