Yesterday’s European market session turned out to be a rather mixed affair, with the FTSE 100 dragged down by the weakness in oil prices, while the likes of the DAX and CAC 40 managed to eke out a positive close.
US markets had a much choppier session, reversing a weak start and finishing the day higher as investors tried to work out whether the diverging economic outlook between the US and EU was something to be concerned about, or merely temporary. US 10-year yields started to edge higher again, after a fairly ordinary seven-year auction.
It has been notable this week that for all the concerns about a slowdown in Europe and a delay to an economic reopening, that any dips in European stocks have been fairly shallow ones. This suggests that for all of the concerns about valuations in Europe at least the appetite for stocks is still there, despite the uncertainty around rising infection rates and the slow rollout of vaccines.
With this in mind and last night’s positive US finish, we can expect to see a positive start for European markets later this morning, as we look ahead to the latest UK retail sales data for February. After a solid rebound in the wake of last April’s lockdowns, apart from a -4.1% decline in November, UK retail sales growth saw an even bigger decline in January, sliding back sharply by -8.2%. This shouldn’t be viewed as too much of a surprise, given that tighter restrictions on movement were brought into effect on 6 January, as people were ordered to stay at home. While some of the big falls in November can be attributed to a pull-forward effect ahead of the Christmas break, the falls seen in January were purely as a direct consequence of consumers pulling back on spending, as we looked ahead to the prospect of weeks and months of tighter restrictions and rising uncertainty.
The picture as we start to look towards the spring is now starting to look a little more positive, with the vaccine rollout helping to underpin consumer confidence, and which saw UK GDP show a much shallower contraction in January than was originally feared. The biggest drag on retail sales will continue to come from the closing of bars and restaurants, which are set to see extremely subdued levels of activity, if any at all, though as recent retail numbers have shown, the boom in online and digital sales is helping to compensate in other areas. The new lockdown imposed in January has hit retail spending hard, however the outlook for February could well be much more positive, with a rebound of 2.1% expected.
The success of the vaccine rollout has manifested itself in some decent gains for the pound these past few months, a trend that looks set to continue as the euro continues to stumble against a backdrop of a faltering and patchy vaccine rollout among EU nations. Politicians there are paying a heavy price for talking down the efficacy of the AstraZeneca vaccine, at a time when infection rates are rising and other vaccines are in short supply.
In the US we also have the latest personal spending numbers which have proved to be a fairly decent bellwether of retail spending and consumer confidence over the last few months. After a strong rebound in the five months after the big declines of March and April of last year, we saw a sharp slowdown at the end of last year. This end of year slowdown was followed by a fairly decent rebound in January as new stimulus payments found their way into US consumers’ pockets. The agreement between US lawmakers over a further $900bn fiscal support package at the end of December helped prompt a big jump in personal incomes of 10%, and a rebound in consumption patterns, with a rise of 2.4% in personal spending.
This rebound is likely to prove temporary in terms of today’s February numbers, as the prospect of another $1.9trn package in March is likely to see a similar boost next month. Having seen a 10% rise in personal income for January, February is likely to see a 7.2% fall, as the one-off payments get smoothed out. The drop in personal income is also likely to see a pullback in personal spending, which is expected to come in at -0.8%.
EUR/USD – continues to drift lower towards the 1.1750 area, a break of which could open up further losses towards the previous lows at 1.1615. The 1.1870 area still remains the key resistance on any pullback.
GBP/USD – appears to have found some support at the 1.3660 area, but needs to get back above the 1.3770 area to stabilise, or risk a move back towards the 1.3500 area. A move above 1.3770 reopens the prospect of a move back to 1.3980.
EUR/GBP – having failed to overcome the 0.8650 area the euro has slipped back with key support still at the 0.8540 area. A break below 0.8540 opens up the 0.8400 area, and potentially a return to the lows last year at 0.8280.
USD/JPY – still knocking on the ceiling of 109.30/40, with a break targeting the 110.00 level. The 108.20 level remains a key support on any pullback.