Wednesday was a slow trading session for major US indices, although the US investors brushed off a part of the European moodiness and didn’t let the S&P and the Dow fell more than 0.21% and 0.11% respectively.
Nasdaq, on the other hand, hit a fresh record, boosted by a solid 5% rally in Tesla on news that the company’s Model 3 ranked number one on the cars.com’s 2021 American-Made Index which examines a range of factors to determine how American a prospective car or truck might be and how much they contribute to the US economy, from jobs to factory plants.
Other electric carmakers rallied, as well, on latest Ernst&Young report stating that the electric car sales in Europe, US, and China will outpace the gas-powered sales by 2033, five years earlier than the previous prediction.
Other good news for electric cars is certainly the rising oil prices. Brent crude consolidates a touch above the $75 per barrel, while US crude is back to $73 after approaching the $75 mark. The oil rally should slow and reverse its course near the $75/78 area, as the rising oil prices only fuel the rising inflation worries, and bring more hawkish thoughts to the market, and weigh on economic recovery and global demand prospects.
Speaking of inflation expectations, Jay Powell now reckons that inflation shot higher than the Fed expected and could also stick around longer than they expected. Today, the data should confirm a 6.4% growth in the first quarter US GDP. A softer-than-expected figure could dampen the investor mood, as investors know that the Fed can’t do much about a slower growth before getting inflation under control.
Elsewhere, the Bank of England (BoE) will announce its latest policy decision today and is expected to bring no change to its policy. Headline inflation in Britain shot above the bank’s 2% policy target in May. The latest PMI figures suggested a slower-than-expected expansion in economic activity, but the strong numbers still boosted inflation expectations.
But the overshoot in UK inflation was already predicted in BoE’s May meeting; it should be temporary and should ease back to 2% in the medium-term. As there is no official update on economic forecasts today, there will probably be no change in the MPC tone. The BoE already announced it would reduce the pace of weekly purchases from £4.4 to £3.4bn in May meeting, therefore, we see no additional change in BoE’s QE policy at this month’s meeting, as the rising concern of the Covid delta variant which delays the full reopening is a growing headache.
On FX, Cable’s recent plunge is mainly due to the US dollar strength following a surprise hawkish shift in the Fed’s tone last week. But the subdued US yields give no way for a further dollar strength right now. Therefore, even a neutral BoE should support a move back above the 1.40 mark.
Index-wise, the FTSE is well positioned to benefit from globally higher interest rates, and the reflation trade, as the index is heavy in banking, energy and mining stocks. I believe price pullbacks in the FTSE are interesting dip buying opportunities to strengthen long positions, and that the second test of the 7200p mark will likely be successful. The FTSE 100 is in a position to return to its pre-pandemic levels, close to 7700p mark, which would be some 5-7% increase from the current levels.