Investment Bank Outlook 07-04-2021

Citi EURUSD has bounced from strong support near the 1.2000 handle to end the session 0.5% stronger at 1.2060. Spot has held around here in Asia since Asia. CitiFX Strategy reiterates their structural bullishness in the pair, and notes that the latest decline in COVID cases should signal stronger upside ahead. CitiFX Technicals sentiment, looks for a potential run up towards the recent high at 1.2150.AUD: pared losses related to China tensions, and closed NY around 0.7780. It has continued to hold around here in Asia since. CitiFX Technicals flags the pair has co day in addition to complete an inverted head and shoulders formation. The team sees a pivotal resistance range ahead at 0.7813-0.7826.GBP: despite gains for the rest of the G10 complex was an outlier amidst Thursday’s price action, and depreciated -0.1% to 1.3895. The performance was likely a reflection back of an earlier MPC decision, in addition to Scottish elections. On the former, the BoE opted for a technical QE taper with to GBP3.4bn/wk per expectations. Forecast r positive with inflation expected to remain on target assuming market expectations of the Bank Rate at 0.3% in 2Q23 and 0.6% in 2Q24 hold. We remain biased to buying assets are under-owned against a backdrop of strong support from reopening timeline and value rotations. JPMorgan NFP will be the event of the day and after some decent profit taking from the HF sector with this data and seasonality in mind the market is certainly a lot cleaner, however the incredible RM streak of USD selling continues and there is a decent risk in the next few sessions USD bears, including myself, will have to stop back in. No strong view in sterling for now, RM were a notable seller yesterday (z-score of 2) snapping their recent run of purchases, BOE’s Broadbent and Haldane will be speaking at 12.15 BST, 1.3930/40 is initial resistance with 1.4000/10 above (0.8715/20, 0.8795 EURGBP) while 1.3835/40 is initial support with 1.3800/10 below (0.8615/20, 0.8580/90 EURGBP).Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 65% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Daily Market Outlook, May 07, 2021

Daily Market Outlook, May 07, 2021 Asian equity markets are mostly higher, but China is down this morning. China’s Caixin services PMI rose to 56.3 in April from 54.3 previously. In Germany, industrial production was reported as up 2.5% in March. The US Federal Reserve, in its latest Financial Stability Report, warned of potential risks to the economy “should risk assets fall” and the Fed’s Brainard noted that “vulnerabilities associated with elevated risk appetite are rising”.The first results from yesterday’s UK elections have started to emerge overnight. In particular, it was confirmed that the Conservatives have won the parliamentary by-election in Hartlepool, taking what had previously been a long-held Labour seat. Counting will only start this morning for some of yesterday’s elections and, in some cases, the results may not be known until Saturday. That will probably include some of the seats in the Scottish parliament and so it may not be clear until then whether the SNP have won an overall majority.Today’s US monthly labour market report which, as always, will be seen as a key barometer of economic conditions. The last print, 916k gain for March, was the biggest rise for seven months and was seen as a signal that employment conditions are improving as the US economy strengthens into spring. Since then we have had further good news including falls in new jobless claims in each of the past four weeks. Consequently, another big employment rise is expected for April. Look for a 925k increase along with a further fall in the unemployment rate to 5.7% from 6.0%.However, even if the report does provide further evidence that the labour market is picking up in a significant way, the Federal Reserve seems unlikely to veer for now from its position that there is no need to consider an early change in monetary policy. Fed policymakers are likely to still focus on the fact that employment remains several million below where it was prior to the pandemic and so conclude that there is ample slack to allow for further growth.In the UK, the construction PMI report for April will provide further evidence on the extent to which economic conditions are improving as restrictions are eased. The March data showed the headline index rise sharply to its highest since September 2014 as all areas of construction activity improved. In particular, it was noted that projects previously delayed by the pandemic were now starting to open up. However, less positively, further significant rises in costs and lengthening supply chains were also noted. Given the extent of March’s gain, it would be no big surprise if the April reading was down modestly. However, its level should still be consistent with strong growth in the sector.G10 FX Options Expiries for 10AM New York Cut(Hedging effect can often draw spot toward strikes pre expiry if nearby)EUR/USD: 1.2000 (537M), 1.2025-35 (1.8BLN), 1.2040-50 (1.4BLN)1.2100 (1.4BLN), 1.2130-35 (618M)USD/CHF: 0.9250 (210M). NZD/USD: 0.7175-80 (296M)GBP/USD: 1.3800 (471M), 1.3900 (861M), 1.3920-25 (565M), 1.4000 (342M)EUR/GBP: 0.8650-60 (845M). AUD/NZD: 1.0800 (351M)AUD/USD: 0.7730-35 (442M), 0.7745-50 (491M), 0.7800 (1.2BLN)USD/CAD: 1.2195-1.2205 (560M)USD/JPY: 109.00-10 (1.2BLN), 110.00 (407M)Technical & Trade ViewsEURUSD Bias: Bearish below 1.2120 bullish aboveEURUSD From a technical and trading perspective, the close sub 1.2080 warns of deeper corrective cycle to test support at 1.1990/60 failure here opens 1.1850Flow reports suggest topside congestion through to the 1.2160 level from the highs and then while there maybe some weak stops just beyond stronger offers are likely through the level to the 1.2200 area with weak stops again appearing but very limited and the 1.2250 again seeing the stronger offers through to the 1.2300 level with the market then having the ability to test this year’s highs, downside bids light through to the 1.2000 area and then weak stops on a move through the 1.1920 level opening the market to the 1.1850 area where stronger congestion appearsGBPUSD Bias: Bullish above 1.39 bearish belowGBPUSD From a technical and trading perspective, as 1.3960 contains upside attempts look for a test of range support towards 1.37.Flow reports suggest topside offers through to the 1.3940 area where offers are likely to be a little stronger with further offers likely to be into the 1.4000 area with stops likely through the 1.4020 area and opening a stronger move higher, downside bids strong into the 1.3800 with congestion likely to continue through the level and while there may be some stops that congestion is likely to continue through to the 1.3750 level, light bids through the level but increasing again into the 1.3700 level with congestion then continuing through the level.USDJPY Bias: Bullish above 108 targeting 112USDJPY From a technical and trading perspective, as 107.50 acts as support there is potential for a test of the pivotal 108.50, through here will open another look at 110.Flow reports suggest downside bids into the 107.80 however, a break through the level is likely to see weak stops and breakout stops appearing and the market free to quickly test 107.50 and an old trendline then nothing until closer to the 107.00 area where stronger bids start to appear but the downside opening to Feb levels, topside offers through to the 110.00 level with light congestion through the figure level and weak stops possibly limited and stronger offers likely increasing on a move higher towards the 111.00.AUDUSD Bias: Bearish below .7700 bullish aboveAUDUSD From a technical and trading perspective, the closing breach of .7730 has relieved downside pressure opening a move to test offers towards .7820Flow reports suggest topside offers continue through the 0.7800 area with a break through the 0.7820 area likely to see weak stops and a test towards the sentimental 0.7850 area however, while there maybe some offers in the area the market looks to be fairly open through to the 79 cents level and ultimately ranges from the end of Feb, downside bids light through the 0.7700 level with weak stops likely on a move through the 0.7680 before stronger bids around the 0.7650 area and continuing through to the 0.7600 likely increasing in size, any further moves are likely to see strong support into the 0.7550 to calm the situationDisclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 65% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Properties for sale for around £1m

Thiviers, Dordogne, France.

Thiviers, Dordogne, France. A rare opportunity to purchase virtually an entire village in the Perigord Vert. The estate features a 16th-century chateau, a further manor house and six cottages, which are set in 173 acres of pasture and woodland. The main properties are all in good condition. £1.087m Hamptons 0207-265 6571.

The Old Hall, Sausthorpe, Lincolnshire

The Old Hall, Sausthorpe, Lincolnshire. A Grade II-listed, late 15th-century house set in large gardens in an Area of Outstanding Natural Beauty. It has exposed beams, an inglenook fireplace and carved panelling in the reception hall. 6 beds, 5 baths, 4 receps, garden room, coach house and stables, 4 acres. £900,000 Robert Bell 01507-522 222.

Porch House, Hillrow, Haddenham, Cambridgeshire

Porch House, Hillrow, Haddenham, Cambridgeshire. A Grade II-listed Elizabethan long house dating back to the early 1600s, surrounded by large gardens in a conservation area. It has beamed ceilings, exposed brickwork, an inglenook fireplace with a log-burning stove, parquet and brick floors and a range of outbuildings. 5 beds, 3 baths, 3 receps, 2 kitchens, conservatory, 2.74 acres. £1.1m Cheffins 01353-654900.

Close House, Dalton, Northumberland

Close House, Dalton, Northumberland. A detached stone house in a small village surrounded by open countryside. It has wood floors, an open fireplace and a newly fitted kitchen that leads on to an extended garden room with a glazed ceiling and exposed stonework. 4 beds, 3 baths, 2 receps, study, garage, stable, loose box, gardens, large paddock, 1.4 acres. £925,000 Sanderson Young 0191-223 3500.

The Tower House, Rusper Road, Capel, Dorking

The Tower House, Rusper Road, Capel, Dorking. This Grade II-listed converted 19th-century water tower once served the Broadwood Estate. It is situated at the end of a private country lane and commands far-reaching views of the surrounding countryside, especially from the tower bedroom on the second floor. It has leaded-light windows and a wooden staircase. 4 beds, 3 baths, 2 receps, breakfast kitchen, gardens, 0.25 acres. £935,000 Jackson-Stops 01306-887560.

Chelsea Manor Studios, Chelsea, London SW3

Chelsea Manor Studios, Chelsea, London SW3. A modern open-plan apartment in a former artist’s studio just off the King’s Road. It has a double-height ceiling with a large window that spans the width of the property. 2 beds, bath, studio, open-plan living room/kitchen. £1.1m John D Wood & Co 020-3369 4319.

Greenaway Cottage, Stockleigh Pomeroy, Crediton, Devon

Greenaway Cottage, Stockleigh Pomeroy, Crediton, Devon. A renovated, Grade II-listed 17th-century cottage with outbuildings surrounded by large gardens with a stream running along the boundaries of the grounds. It has wide elm floorboards, oak beams, an inglenook fireplace with a wood-burning stove and a home office in a timber-clad outbuilding. 4 beds, 3 baths, 3 receps, gardens, meadow, 5.9 acres. £1.1m+ Knight Frank 01392 423111.

The Boatyard, Boatyard Lane, Barlaston, Stoke-on-Trent

The Boatyard, Boatyard Lane, Barlaston, Stoke-on-Trent. This property was originally an 18th-century blacksmith’s cottage and dry dock and offers a rare opportunity to buy a family home with a private dock with 180ft of moorings for narrow boats on the Trent and Mersey Canal. The house has beamed ceilings, an open fireplace and a green oak garden room. 4 beds, 2 baths, recep, study, kitchen, garage with workshop and games room above. £1m+ Savills 01952-239 500.

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Wine of the week: five superb clarets drinking now

2014 Clos Sainte Anne, Côtes de Bordeaux, France 

£14.10, reduced to £12.50 each by the case, Haynes Hanson & Clark, 020-7584 7927, hhandc.co.uk 

I am writing this column surrounded by sample bottles from the finest Bordeaux châteaux – Mouton Rothschild to my right, Haut Brion to my left, and rows upon rows of famous names as well as lesser-known estates in between. It is the “en primeur” time of year and wine merchants and commentators alike are wading through hundreds of 2020 vintages to give wine collectors their thoughts on whether it’s worth buying a few cases of these vinous futures for investment or simply to drink with their friends. By the time this column is published I will have uploaded legions of notes, free to view, on my website, so please take a look – 2020 is a patchy vintage that needs careful guidance.  

But while none of these wines will be drinking for years, I thought you might need to slake your thirst on some great clarets that are drinking right now, and are fabulous value for money and amazingly accurate, too. Clos Sainte Anne is utterly delicious, superbly suave, balanced and bright, and it is a thrilling bargain. While you are at it, grab the following Châteaux from HH&C, too: 2018 Les Reuilles (£10.40) is a fabulous, all-purpose “house claret”; 2018 Garras (£13.50) is a mineral-soaked, violet-tinged beauty from Cadillac; 2018 Haut-Vigneau (£21.40) is a plush Pessac-Léognan brimming with purity and élan; and, finally, 2012 Baron de Brane (£33.75) is a sensual and sensational second wine from a famous Margaux property. 

Matthew Jukes is a winner of the International Wine & Spirit Competition’s Communicator of the Year (matthewjukes.com)

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Dollar Edges Lower; April Payrolls Data in Focus

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Market Update – May 7 – USD weaker ahead of NFP

Market News Today – USD moves lower, (USDIndex down (0.45%) to 90.80 earlier), EUR and Sterling both bid. Equities all closed higher (new ATH for USA30, USA500 +0.82%) Financials biggest gainers. Commodities tear continues GOLD breaks $1820.  10-yr Yields slip with USD to 1.568%. Asian markets higher on strong data, from JPY (Earnings), CNY (Services PMI & the Trade Balance more than doubled) and NZD (inflation expectations).

EUR – rallied to test 1.2070, JPY holds over 109.00 at 109.15, Cable rotates around 1.3900 again after volatile BOE reaction and ahead of Election results. AUD rallied to  0.7790, and CAD moves down from 1.2300 to 1.2140 – a new 38-month low. 

USOIL peaked at $66.65 Tuesday tested under $65.00  Gold – major rally to $1820 first daily close over 200-day MA (1796) since mid-February. Commodities remain robust. BTC back down from test $58,000 yesterday to  $56,000 now.  

European Open – The June 10-year Bund future is down -11 ticks on the day, underperforming versus Treasury futures, which are little changed. In cash markets the 10-year Treasury rate has dropped -0.3 bp to 1.566% overnight, despite markets positioning for a stellar U.S. jobs report, which owes much to reassurances from major central banks that they will be patient on tapering and rates. Stock futures are moving higher, with DAX and FTSE 100 futures currently posting gains of 0.8% and 0.6% respectively. U.S futures are underperforming, but also supported with a 0.3% rise in the NASDAQ leading the way.

Today – UK construction PMI, US and Canadian labour market reports, ECB’s Lagarde, BoE’s Haldane, Broadbent, Fed’s Barkin Earnings from Adidas, BMW, Credit Agricole, IAG, Siemens.

Biggest (FX) Mover @ (07:30 GMT) GBPAUD (+0.34%) rallied from 7-day lows below 1.7830 yesterday to test PP at 1.7900 today. Faster MAs remain aligned higher, RSI 53 & moving higher, MACD histogram & signal line aligned higher but under 0 line. Stochs rising to test OB zone. H1 ATR 0.0016, Daily ATR 0.0117.

Click here to access our Economic Calendar

Stuart Cowell

Head Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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Dollar Down, Feels Pressure Over Positive U.S. Employment Data

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Dollar on backfoot ahead of U.S. jobs data

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Cheap money lifts UK house prices

Nationwide reports that UK house prices rose by 2.1% in April from the month before, the biggest jump since February 2004. Prices have gained 7.1% in the past year. The upswing should keep going, says Andrew Wishart of Capital Economics. Survey data from the Royal Institution of Chartered Surveyors shows strong sales and limited stock for sale. Web searches for homes hit a six-year high last month. 

This has been a boom like no other, says Roger Bootle in The Daily Telegraph. House prices fell in real terms during the last four UK recessions. This time they have risen thanks to extensive government support and ultra-low interest rates. The ratio of average house prices to average earnings is now close to its 2007 high. Does that mean we are heading for a crash? Probably not. Households are finding mortgage payments manageable thanks to rock-bottom interest rates. A property slump looks unlikely before the Bank of England tightens the monetary screws. 

The average house price was rising by £200 a day last month, notes The Observer. Signs of a strong UK recovery are to be welcomed, but it’s a shame it had to happen in the housing market. For all the talk of building back better, the government has instead served up a “bog-standard recovery built on cheap money, property speculation” and debt. Housing market growth “is the wrong sort of growth”. 

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GBP/USD Shrugs BoE's Bond Buying Tweak; Scottish Election Outcome Eyed

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Crypto currency ether rises to new record high

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How will India’s Covid crisis affect the global economy?

Just when it appeared there was a light at the end of the tunnel for the Covid crisis, India is shattering global records, giving the world a harsh reality check that the pandemic is far from over.

The world’s fifth largest economy reported a new global all-time high of 412,431 cases on 5 May just days after it crossed the grim milestone of over 200,000 deaths and 20 million infections.

What’s more is that it recently overtook Brazil to become the second most affected country by case numbers and now regularly reports new daily covid cases of more than 300,000.

Calling these numbers dire is a massive understatement. But even this horrifying data is considered to be grossly understated because of a lack of reporting and testing facilities. Medical experts fear the actual toll of deaths and cases could be up to ten times higher than currently being reported.

Should investors be worried about India’s ongoing crisis or is this just a humanitarian crisis that will not reverberate abroad?

The world’s largest vaccine producer has run out of vaccines

The developments in India are likely to keep market watchers on their toes, simply because of the role the country plays as both a major vaccine producer and a top consumer of commodities.

India is the world’s biggest vaccine producer who recently as a few months ago hailed itself as the “pharmacy of the world”.

And yet despite the leading role the country plays in donating and selling vaccines to the globe, India is struggling to gain sufficient vaccines to inoculate its own population.

A dangerous Indian variant called B1.617– cases of which have even been detected in the UK and other countries – is spurring infections and deaths across India. That, combined with mass religious gatherings, election rallies and premature lifting of Covid restrictions, has overwhelmed India’s healthcare. There is also a massive shortage of oxygen and other vital healthcare infrastructure.

The deadly second wave in India prompted the country to temporarily ban exports of the AstraZeneca vaccine – locally produced by the Serum Institute of India under the name Covishield. The second major vaccine in use is the country’s Covaxin produced locally by India’s Bharat Biotech.

Why does any of this matter?

India donates much of the Covishield vaccine through the international Covax Schemeof the World Health Organisation (WHO), which was created last year to improve the supply of vaccines to poorer countries who face difficulties accessing them. India provides 86% of supplies to Covax, reports the Economist, so India’s vaccine woes could spell trouble for poorer countries, particularly in Africa where much of the continent was relying on supply from India.

At the time of writing, India has administered just over 160 million shots of any Covid vaccine, a drop in the ocean relative to its population of 1.3 billion people. The number of second doses is also low at 30 million.

“India is racing against the clock to vaccinate its population but simply does not have enough to meet the soaring demand, having delayed signing contracts, and appears sorely lacking in some of the infrastructure required to administer them,” Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, tells MoneyWeek.

But Paul Dales of Capital Economics points out India’s vaccine shortage will not deter the UK's successful vaccination drive as vaccine supply from India represents a very small proportion of UKs’ aggregate supply.

How India’s crisis could affect global markets

India’s concerns have prompted jitters about the international oil price. While the price of international benchmark Brent crude has risen by more than 30% since the start of the year, fuelled by recovery optimism, oil prices fell a little last week on the fears that India’s crisis may lead to a prolonged slump in economic activity. Why?

India is the world’s third largest importer of crude oil. So far Prime Minister Modi has resisted calls for a national lockdown and opted for local/regional ones instead. But failure to secure enough vaccines, or an uncontrollable spread of the Indian variant, may leave Modi little choice and cause a demand shock for the fuel.

Gold prices may also come under pressure due to India’s violent outbreak, as India is a major buyer of gold. The precious metal holds much cultural significance in the country, particularly in weddings and religious settings, but with fewer celebrations now taking place, demand could take a hit.

Giles Coghlan, chief currency analyst at broker HYCM tells MoneyWeek although demand could technically pick up in August – India’s typical wedding season – pressure from rising US interest rates may keep demand for bullion low.

The real risk comes from higher interest rates, not India’s crisis

Currently, markets are still focusing on an economic recovery and resumption of normality, so the real risk to markets at the moment comes from the spectre of rising US interest rates.

“Copper prices just hitting $10,000 a ton undernight shows that the firm focus is on that global recovery and India is not going to be dragging or altering that broad perspective,” Coghlan points out.

US Treasury secretary Janet Yellen surprised markets this week when she said interest rates may need to rise slowly to prevent overheating of the economy. While the former Fed chair does not have control over monetary policy, markets didn’t take her comments lightly.

Yellen’s latest comments contradict the long-term view of Fed chair Jay Powell and of her own administration, all of who have spent weeks trying to convince markets that inflation isn’t going to be a problem for now, despite the signing a $1.9trn stimulus package in March and around $4trn further spending packages announced by Biden.

Yellen’s comments triggered a sharp-sell off in technology stocks, which may be unsurprising given those stocks have benefited from a period of ultra-low interest rates and were looking overpriced. Although Yellen later said she doesn’t see inflation as a problem, higher interest rates are now more of a reality than they were before.

While Indian assets have been hurt, it is to a much smaller extent than might be expected. “The benchmark Sensex index has dropped sharply compared to FTSE’s All-World index since the second wave began, but in relative terms it is still far ahead of where it was last summer, when India appeared to be relatively lightly affected,” says John Authers of Bloomberg.

So whether India’s crisis hurts investors or not, one thing is clear that the environment is no longer hospitable for high flying growth stocks such as tech companies which would be most hurt by higher rates. Things are still looking favourable for cyclical stocks, that should benefit from a reopening.

“Within a few months the vaccine rollout programme is expected to have an impact in India, just like it has had in Israel, the US and the UK. So you'd expect India to eventually catch up and everything to potentially return back to normal as long as the Fed hasn't started raising interest rates too quickly,” Coghlan says.

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Weekly Claims breach the significant 500,000 level

EURUSD, H1

US initial jobless claims dropped -92,000 to 498,000 in the week ended May 1, more than expected and posting another new post-covid low, after sliding -13,000 to 590,000 (was 553,000) previously. Just before the US economy closed last year, claims were at 256,000 in the March 13 week. The 4-week moving average fell to 560,000 from 621,000. Initial claims not seasonally adjusted tumbled -107,400 to 504,700, following the prior 27,000 jump to 612,100. Continuing claims bucked the trend and climbed 37,000 to 3.690 million in the April 24 week after bouncing 1,000 to 3.653 million in the April 17 week.

Initial claims are entering May below prior averages of 580,000 in April, 724,000 in March, and 800,000 in February. The 566,000 April BLS survey week reading sharply undershot recent survey week readings of 765,000 in March and 847,000 in February. The diminished downtrend in continuing claims caps the significance of the big initial claims declines into May. The median consensus for tomorrow’s April nonfarm payroll forecast remains in the 978,000-990,000 range, with an upside bias, the highest estimate being around 2.1 million.  

Earlier, the US Challenger reported that announced layoffs declined -7,700 to 22,900 in April following the -3,900 drop in March to 30,600. It is a third straight monthly decline. On a 12-month basis, announced layoffs are down -96.6% y/y, versus -86.2% y/y previously. Last April, employers had announced a record 671,000 in cuts. Challenger said the good news is that layoffs are declining, but the bad news is that employers are seeing labour shortages, even with millions still unemployed. Aerospace/defense led the job cut announcements last month. Announced hirings declined -21,400 to 76,300k after March’s -48.600 decline to 97,800.

The Dollar moved higher after the lowest initial jobless claims print since the beginning of the pandemic, though continuing claims firmed up some. Q1 productivity rose more than expected. USDJPY rallied modestly toward R1 at 109.40 before slipping back to 109.20, EURUSD edged a few points low to near R2 at 1.2047, before again challenging above R3 at 1.2070.

Click here to access our Economic Calendar

Stuart Cowell

Head Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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The house price boom is all about what people can afford to pay

In mid-2020, the Office for Budget Responsibility was getting nervous about UK house prices. It was forecasting that they would fall into the end of 2020 and then fall some more, to end 2021 down by 11% on the year. They weren’t alone in their pessimism (or maybe optimism – how you see this depends on whether you are a buyer or a seller). At the same time, the Centre for Economics and Business Research was forecasting a 14% fall. 

They were all completely wrong. In April, the Nationwide House Price index showed prices jumping 2.1% in April alone (a 17-year high) and 7.1% over the year. The average house price is now at a record high (£238,831). Transactions are on fire: in March there were more sales than in any month since records began in 2005, with mortgage approvals running 13% higher than they were pre-pandemic in February 2020. Ask any estate agent and you’ll hear endless anecdotal evidence of a frenzied boom: more buyers registered with each estate agent than ever; viewings limited to 15 minutes; houses selling in days; first bids coming in 20% above the asking price.

So what has happened to make so many respected forecasters so spectacularly wrong? It is the usual story: fast rising demand hits limited supply. This is partly about the extension of the stamp duty holiday. This now runs until the end of June, so the race is on to buy. That has “lit a fire under buyers” already feeling some urgency to reset their lives post-pandemic, as Hargreaves Lansdown points out. 

But this isn’t just about what people want (home offices, more rooms all round and outside space), it’s about what they can afford to pay. Right now they can afford to pay a lot more than a few years ago. That is partly about having hard cash for deposits. Since March last year, the UK population has added over £200bn to their savings accounts, with another £16.2bn deposited this March alone (the pre-pandemic average per month was £4bn-£5bn). 

It’s also about mortgage rates being very low (under 2% on average). The house price to earnings ratio might be at an all-time high – and it is true that the last time they hit these sorts of levels (2007) they fell 20% soon after – but take out an 80% mortgage on the average house in the UK today and it will cost you around 36% of the median income, says Capital Economics. The average since the 1970s? Around 43% – with nasty peaks in 1989 and 2007 at over 60%. Houses may look very expensive, but on a monthly payment basis, they cost an awful lot less than before (in 2007 average mortgage rates were around 6%).

So what next? How long can the frenzy last? Demand may start to fall as the stamp duty holiday comes to an end (sales fell sharply after the 2008-2009 stamp duty holiday), an increase in supply appears and as lockdown fades (will we keep working from home?). But the real change will come if – when? – mortgage rates rise. They can’t fall much further – and so will soon have provided all the support they can to borrowers and hence to house prices. 

We don’t expect rates to rise to keep up with inflation (they have to stay lower to erode our debt in real terms) but there will be an uptick at some point. That may not be enough to cause anything too nasty (certainly not in nominal terms) but it may mean that house prices next year aren’t much higher than they are this year.

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