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US retail and investor caution keeps markets on the back foot

Stocks had a disappointing day yesterday with a weaker bias across the board, despite further gains in the oil price, as a lack of positive drivers weighed on sentiment.

It would be ironic in the extreme now that the worst of the political fog appears to have cleared, that we could well see stock markets post their first negative week since early April.

It seems that while political risk has subsided investors remain far from convinced that further upside can be sustained without further evidence of a positive pickup in the economic numbers.

Today in Europe we have preliminary German Q1 GDP which is expected to show an improvement to 0.6%, while April CPI is expected to be confirmed at 2%.

Putting to one side the soap opera that is the Trump administration’s infighting and concerns about when we’ll get to see any of the President’s various reform programs this year, we continue to be told that the US economy is doing very nicely, with the US Federal Reserve on course to raise rates for the third time in seven months when they meet in June.

US job gains continue to trend at around 200k a month apart from the March outlier of 79k, with unemployment at a 16 year low and consumer confidence near a 17 year high.

On the other hand the US retail sector seems to be telling a different story, with US retail stocks falling sharply yesterday, after Macy’s and Kohl’ s reported weak first quarter sales, sending the sector into a tailspin, ahead of more data next week, with Macy’s dropping 17%, while Kohl’s and Nordstrom both fell over 7%. Snap also fell sharply as its post IPO bubble burst, closing down 21% as the penny finally dropped with investors that it may well struggle to make any sort of profit, when it has such easily replicatable technology, as Facebook cannibalises its revenue stream.

Monthly retail sales also seem to be telling a different story with the April numbers due later today after disappointing numbers in February and March of -0.3% and -0.2% respectively. Consensus is for a rebound of around 0.6%, which would go some way to offsetting a disappointing end to the first quarter.

We also have the latest US CPI numbers, which are expected to remain at the 2% for core prices and 2.3% for headline inflation.

The pound had a difficult day yesterday after a fairly downbeat assessment of the UK economy by the Bank of England, as Governor Mark Carney warned that the pinch on consumer incomes was likely to increase as price inflation moved above wages, thus constraining retail spending, which diminished expectations that rates were likely to move in the near term. Combined with some disappointing economic data the pound hit its lowest level this week against the US dollar.

Even though markets focussed on the short term negatives, the bank did warn that the market was under-pricing the risk that rates would move more than once in the next three years, and that it wouldn’t take too much of an improvement in the data for other policymakers to join outgoing MPC member Kristin Forbes in pushing for a rate rise.

EURUSD – while we remain above the 200 day MA and 1.0820 area, downside risk is likely to be limited, and a return to the 1.1000 area remains a possibility. A move back below 1.0800 could well see further losses towards 1.0640, thus filling the gap higher seen at the beginning of April.

GBPUSD – slipped below 1.2920 yesterday opening up the risk of a move towards the lows last week at 1.2820. The 1.3000 area remains the next key hurdle to overcome for a move towards 1.3300. Only a move below 1.2750 argues potentially back towards the 1.2600 area.

EURGBP – we saw a nice rebound yesterday with the prospect we could squeeze back to the 0.8470 area. A move back above 0.8470 retargets the 0.8520 area. While below 0.8470 the risk remains of a move back to the 0.8300 area.

USDJPY – we’ve seen three attempts to move through the 114.40 area, which is the main obstacle to a move towards 115.00. If we fail to push through here we could see a return to the 113.00 area.

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