UK Interest Rates to 5.5% 

The 0.25% rise in UK interest rates is a bit of relief after speculation that the MPC might hike by 0.5%. But the majority of forecasters may be wrong in thinking that today's move is the last of the cycle. There is still little sign that the previous increases are having much effect on activity. High street spending remains pretty solid and this morning's Halifax figures underlined the momentum in the housing market. Meanwhile, although consumer price inflation is set to fall back sharply over the coming months (the MPC will have seen the April figures before today's decision), the Committee is likely to remain concerned over the medium-term outlook given signs of rising pricing power, rapid money growth and buoyant asset prices. As such, we can still expect another hike to 5.75% over the next few months, probably in August but possibly as soon as June - next week's Inflation Report will give more clues on this. Rates should come back down next year as the economy slows and inflation fears finally subside. Bottom line: The pressure on rate expectations, and the pound, looks set to remain upward for a while yet.

U.S. Small Business Survey: Too Soon For Fed Rate Cuts

U.S. small businesses are still up beat about hiring, and are keen to lift prices.

Hiring plans and job openings amongst small US businesses are holding up at moderately high levels, and overall business conditions are still seen as being decent. Meanwhile, there are still some lingering inflation risks: the number of firms that are raising prices has also stayed firm. While the market appears to be looking through any lingering price pressures, the NFIB survey underscores that the main concern at the Fed is the danger that the economy may regain vigour and reignite inflation. This is consistent with other April data. Bottom line: Although we can expect sub-par growth to continue, due to weak housing and soft consumption, lingering inflation pressures and a decent employment backdrop imply that the Fed will remain on the sidelines.

Japanese Nikkei: Plenty Of Value But Needs A Catalyst

The Japanese stock market offers good value but the struggling economy is preventing another upleg in relative performance.

The Nikkei is arguably one of the cheapest markets in the world. The forward P/E ratio is about 18 times, which is well below fair value given that the equilibrium bond yield is probably around 2%. However, despite attractive valuations the stock market has dramatically lagged the latest global upswing. The problem has been recent softness in the Japanese domestic economy, which has caused investors to question the durability of the expansion. Moreover, the yen has weakened, further undermining returns in common currency terms and removing beta from this market. A sustained upleg in relative performance probably awaits improvement in the domestic economy, allowing the Nikkei and yen to rise simultaneously. Bottom line: This could unfold later this year, but in the interim, downside in the Nikkei should be limited given favourable valuations.

France: Sarkozy The Saviour?

Nicholas Sarkozy's victory in the French presidential election is a positive for the economy and stock market, but probably does not herald a structural 'rupture' in policy on a par with Thatcher in Britain.

The French electorate has voted for change. Both Sarkozy and Royal represented a break with traditional politics. Demands for change stem from the fact that France's economy has lagged the region in recent years, as other counties, most notably Germany, have undertaken reforms to boost competitiveness. The loss of competitiveness is reflected in France's declining share of Euro area exports and substantially higher unemployment rate. Yet France is not in crisis, so demands for change will be balanced against maintaining the country's comfortable standard of living (for the employed). Bottom line: Although the election does not mark the beginning of a major transformation in France, Sarkozy's victory reinforces an upbeat view of the Euro area economy and equity markets.  

And finally......

Tony Blair and David Cameron somehow ended up at the same barber shop.

As they sat there, each being worked on by a different barber, not a word was spoken.

The barbers were both afraid to start a conversation, for fear it would turn to politics.

As the barbers finished their shaves, the one who had Blair in his chair reached for the aftershave.

Blair was quick to stop him jokingly saying, "No thanks, my wife Cherie will smell that and think I've been in a brothel."

The second barber turned to Cameron and said,  "How about you Mr Cameron?"

Cameron replied, "Go ahead, my wife doesn't know what the inside of a brothel smells like". 

Prometheus from sources: ADM, Barclays Capital, Cazenove, Charles Stanley, HSBC, ING, SocGen, UBS.