European markets struggled for direction yesterday caught in a corridor of uncertainty just below recent highs, as the various meetings of NATO, EU and G7 leaders got under way in Brussels.
The tone of the various meetings was uncompromising, with NATO agreeing to boost its deployments to the eastern borders of the NATO alliance, while warning President Putin against deploying chemical or other weapons of mass destruction.
US markets, on the other hand, shrugged off yesterday’s uncertainty boosted by a decline in weekly jobless claims to a 53-year low, and better than expected flash PMI numbers. The gains in equity markets came in spite of a continued sell off in US treasuries as yields headed back to their recent highs. Investors appear to be slowly coming to terms with the prospect of higher rates, and a probable 50bps move in May, perhaps on the basis that even a 1% move in rates by the summer would merely put the Fed funds rate back to the level it was pre-pandemic.
Oil prices, on the other hand fell back below $120 a barrel as it became apparent that any agreement on the part of the EU to boycott Russian oil imports was unlikely to happen.
As we look ahead to today’s European open, we look set to open higher after last night’s positive US finish, with today’s focus set to be on UK retail sales for February and the latest German IFO business survey for March.
UK consumer spending saw a strong rebound in January, after the -0.4% slowdown seen in December. Not only did fuel sales recover, but we also saw a strong rebound in household goods and furniture, with high street sales showing a decent pickup, as 2022 got off to a decent start with a 1.9% rise.
The numbers also show that while demand appears to have picked up, the retail sector still has to confront significant challenges in the months ahead as prices rise, and disposable income starts to reduce.
This squeeze hasn’t yet shown up in the latest BRC retail sales numbers, which showed that total sales rose by 6.7% in February, as the complete removal of Plan B restrictions at the end of January buoyed spending, however the squeeze on incomes has shown up in this morning’s Gfk consumer confidence numbers for March which showed a fall to -31 from -26 in February, and the lowest levels since November 2020.
Like for like sales showed a rise of 2.7% from this time last year, although it should be remembered the UK was one month into its third Covid lockdown.
Sales of clothing and footwear saw a decent increase in February, while food sales slowed with the latest data from Barclaycard showing spent 13.7% more in February this year than they did in February 2020.
As such we should see UK consumer spending continue to look solid in February, with retail sales set to rise by 0.5% excluding fuel sales and 0.7% with fuel sales included.
The German economy has thus far seen a decent rebound since the start of this year, after a weak end to 2021. This bounce back is now starting to run into problems with rising input costs, factory shutdowns, and the sanctions on Russia.
While this doesn’t appear to have shown up in the latest PMI numbers it has prompted the Bundesbank to downgrade its growth forecasts for the German economy.
It is also likely to manifest itself in further weakness and deteriorating sentiment amongst German business leaders. Today’s German IFO survey is likely to see a further decline in IFO Business Climate to 94.2 from 98.9, while the expectations index is expected to see a return to the levels seen at the beginning of last year, with a decline to 92, from 99.2 in February.
EUR/USD – finding support for now at the 1.0960 area, with a break below 1.0950 signalling a move towards 1.0900. We need to push up through the 1.1120 area to signal a move towards the 1.1250 area. Key support remains at trend line support from the 2017 lows, at 1.0810.
GBP/USD – has slipped below the 1.3200 area but is holding above the 50-day MA and 1.3160 area for now, keeping the prospect of a move towards 1.3420 intact. We still have support at the 1.3000 area and need to hold above that to minimise the risk of a move towards 1.2800, on a break below 1.2980.
EUR/GBP – has so far held above support at the 0.8280 area. A move below 0.8280 signals a retest of the lows at 0.8200. Resistance comes in at the 0.8420 area.
USD/JPY – has continued to move higher and now looks set to push up towards 123.70/80 and the December 2015 peaks. Having move above 121.70 area, which was the 2016 highs, this should act as support.