Expected today was UK retail sales data, which rose 2.9% in the previous month. April's decline of -1.8% during a period of heavy rain on the island kept customers away from the stores, according to the UK's Office for National Statistics. The expected forecast was for a positive correction of 1.5% according to surveys but this has been far exceeded. Also important has been the factor of inflation, which had been very high until the previous month and returned to the right direction of the Bank of England after 3 years above the 2% target, which nevertheless remains high at around 5.7%. Add to this the increase in the average wage value versus inflation rate and consumer confidence appears to be recovering to 2021 values, according to the LSEG/Ipsos Primary Consumer Sentiment Index - PCSI survey which came in at +53.0 on Thursday, one of the oldest measuring indices started in 2010.
Adding to what has been said yesterday, hopes of possible election rumors, it is believed that a landslide victory for Labour against the Tories, who claim to hold the key to rebuilding growth and carefully managing the state's coffers, currently heavily burdened with debt, may be in the offing. This would be a turnaround from 2016's Brexit and former Prime Minister Liz Truss's skeletal mini-budget for 2022 that hasn't been varying much. It is clear that if Labour wins rate cuts are looming to shrink debt and prop up the price of the pound and the search for stability in economic policy. UK fund managers seem to be hopeful of this, and it is believed that equity and credit valuations in the UK do not yet reflect the good that is to come, which would affect a better government bond rating, because of the tail risk that the Tories currently have with their fiscal policy, but it must also be understood that the 47.5 billion plus owed by the UK to Europe is not paid overnight and it was clear that there was going to be an economic impact. Some analysts believe that the reputation of increasing taxes and public spending may negatively affect bonds, because public finances are not in good shape. Nevertheless, two-year bonds fell to their lowest level after the BoE's decision according to LSEG, and this has caused them to outperform U.S. and European bonds due to those releases. It is possible that once the election factor is removed the UK's idiosyncratic risks and persistent inflation will facilitate a period of greater stability.
Today being the Quadruple Witching Hour also known as Freak Friday where the quarterly maturities of futures and options on indices and stocks occur, with historical records in most of the equity markets, investors have reached Thursday with portfolios that recorded significant capital gains, hence, also warns the risk of a possible profit taking or at least put the brakes on the positions. And that is why today the markets are starting the morning in the red.
If we focus on the FTSE 100 in London, we have witnessed since May 15 how the price corrected from the highs at 8,492.21 points, again the index tried to recover strongly the price to 8,371.41 points and then we have seen how since the beginning of the week an upward movement began. Currently the price zone of 8,260 points is considered overvalued and the RSI has marked an overbought signal at the beginning of the session, so it would not be unusual for the index during the summer period to begin a corrective period coinciding with the elections in the direction of its last support at 8,107.97 points. If the market remains in this bullish cloud, it is likely to retest the second resistance prior to the highs, where we will see if the market continues to support the index shares with the same strength or not.
Ion Jauregui - ActivTrades Analyst
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