Markets in Europe initially took their cues from the weakness in US markets yesterday in the wake of Wednesday's surprise shift in the Feds timeline for potentially raising interest rates.
While the FTSE100 was the worst performer largely as a consequence of a big sell off in precious metals prices dragging on the mining sector, the rest of Europe mostly finished the day higher, with the Euro Stoxx 50 posting a new record high.
US 10-year yields which also experienced a sharp move higher in the aftermath of that decision, also gave up a good chunk of that rise, as markets started to settle on a more reasoned view of what the Fed actually did on Wednesday.
The reality remains that the Fed is a long way from withdrawing stimulus, it’s merely seeding the ground for a slower rate, which could start towards the end of this year, data permitting.
The US dollar, on the other hand appears to be holding onto its gains, and this is merely a consequence of the expectation that it is leaning towards what it might do as the economy starts to improve over the next couple of years, something other central banks appear to be light years away from.
Last night’s US finish saw the Dow finish lower again for the fourth day in a row, and on course for a second successive weekly decline, while the Nasdaq finished higher, with the prospect that we could see a fifth successive weekly rise
As we look to today’s European open, we look set for a mixed start with the focus on today’s UK retail sales numbers to round off a week of fairly strong UK economic data, ahead of next week’s Bank of England monetary policy decision.
UK retail sales have slowly been recovering since the big -8.2% decline seen in the January numbers, largely as a result of the total lockdown imposed at the beginning of the year.
Since then, we’ve seen a coiled spring rebound with a 2.2% rise in February and then a 5.1% rise in March, which was primarily driven by people shopping in garden and DIY centres, as we saw a 16% rise in household goods.
March also saw a big rebound in clothing sales as consumers looked towards further easing measures in April, along with higher fuel sales as people started to move around more.
The direction of travel for April retail sales was even better with a 9.2% rise in the wake of the 12th April easing measures, with the further relaxation in May likely to have given an additional boost to the May numbers, if last week’s BRC retail sales numbers are any sort of leading indicator.
According to the British Retail Consortium May sales rose at their best rate since the pandemic struck the UK. Total sales increased 10% in May compared to 2019, and by more than the same number in April on a two-year basis, with clothing retailers the biggest beneficiaries of a return to the High Street.
We could also have seen some forward bookings for hotel accommodation in the leadup to the May reopening as consumers book time away over the half term break, while the reopening of cinemas could also have acted as a boost.
If the recent May services PMIs are any guide, we could well still see a fairly robust month for consumer spending in May, though official estimates appear to be more conservative with a rise of 1.5% expected, over concern that slowing supermarket sales might act as a brake on spending.
In Asia the Bank of Japan left monetary policy unchanged while extending its special lending program for companies affected by the pandemic to March 2022.
EURUSD – broke below the 50-day MA for now and the 200-day MA at 1.1980 as well. We now look set to a move towards the 1.1850 area. Resistance now comes in at the 1.2070 level.
GBPUSD – slid below the 1.4000 area and could spill over towards 1.3870. Bias is still positive, while above this level. A move below the 1.3870 trend line suggests a move towards 1.3800. Resistance still at 1.4200 with a move through the 1.4240 area targeting the 2018 peaks at 1.4375.
EURGBP – still looks soft with resistance at the 0.8640 area which keeps the bias towards the downside, and a test of the 0.8560 area. A break below 0.8550 opens up the recent lows at 0.8480.
USDJPY – bias remains for a move higher towards the 111.00 area while above the 109.80 area. A move below trend line support now at 109.70 opens a move back towards the 108.60 area on a break below 109.20.