End of the first quarter, British pound tests yearly highs

It’s the last day of Q1, which for many has been a bit of a head-scratcher. Stock markets have flipped back and forth in sideways action whilst gold has rallied, oil prices dived and the dollar turned lower as the market generally weathered troubles in the banking sector.

On Thursday the British pound was a top FX riser and those gains have been supported early Friday after UK GDP nudged into positive territory, rising 0.1% q/q up from 0.0% at the last reading. Global markets mostly closed higher, as did gold and crude oil.

Key Factors for Today

• European markets are set for a mixed open
• US futures point to a flat open on Wall Street
• Asian markets mostly rise, extend weekly gains

• UK Q4 GDP surpasses expectations in the final reading
• Turkey formally approves Finland’s NATO membership

Market movers

• Nasdaq 100 at highest since August
• FTSE 100 closes over 7600
• WTI crude oil closes over 74, rises for 6 of the last 9 days
• Bitcoin touches 29,000 then rolls over back to 28,000
• GBP/JPY hits 165, makes new closing high for 2023
• EUR/USD tests March high circa 1.09

Econ Calendar

• UK GDP (q/q) (7 am)
• German Retail Sales (7 am)
• German unemployment (8.55 am)
• Eurozone CPI (10 am)
• US Core PCE Price index (1.30 pm)
• Canada GDP (m/m) (1.30 pm)

Earnings

• Sofina SA
• BTG Hotels (Group)
• Nordex AG
• Computacenter Plc

End of Q1, what’s in store for Q2?

The quarter was again dominated by shifting expectations for interest rates. Persistently strong inflation, particularly in the UK and Europe but also in the US, would imply further rate rises from the Fed and generally higher bond yields. That view has been undermined by forecasts of recession and now a banking crisis.

There are divergent views on whether these were just ‘a few bad banks’ and that the situation is now contained or whether the issues that caused their demise are more systemic. Either way, the resulting uncertainty means the consensus view is that the Fed is 25-50 basis points away from finishing its rate hikes.

This has fuelled gains in tech stocks where high valuations are more heavily affected by interest rates. The tech-heavy Nasdaq 100 index just hit its highest since August. The S&P 500 is on course for its best week since January.

As we discussed yesterday, expectations for lower interest rates at a time when inflation is still high have created a goldilocks environment for precious metals.

This morning, the latest update for European consumer price inflation is released, which is expected to cement expectations for another 50 basis point hike from the ECB next month. That partly explains the approx 2% gain in the euro this quarter.

The pound has gained over both the dollar (+2.5%) and the euro across Q1. Negative UK economic forecasts, including from the Bank of England, have so far largely proved unfounded. The UK economy grew by 0.6% year-over-year in the fourth quarter according to data released this morning.