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Europe set to open higher, ahead of US retail sales

US retail sales in focus

In what’s been quite a turbulent week, European markets managed to close well off their lows yesterday, and while the FTSE 100 wasn’t quite able to reverse all of its losses on the day, due to weakness in energy and basic resources, we did see some stabilisation after what can only be characterised as a week of high volatility and some heavy selling pressure.

Today’s European session looks set to start on a positive note after yesterday’s US rebound, however as the UK gets set for a further relaxation of restrictions next Monday, there is some apprehension about a rise in cases of the Indian variant in some parts of England, with some calling for Monday’s relaxation to be delayed.  

While US markets managed to reverse some of Wednesday’s losses it was notable that the Nasdaq rebound lagged behind, in a sign that perhaps the downside bias that we’ve seen so far this week might not be completely done with.

One major factor helping yesterday’s rebound was a decline in US 10-year yields, despite another strong April inflation report, this time US PPI which jumped to 6.2% year on year, up from 4.2% in March.

This bigger than expected rise does suggest that we will probably get another 2 or 3 months of high inflation prints, which also presents the Federal Reserve with a problem, with so many people starting to get nervous that base effects may not be able to explain all of the upward pressure on prices.

While no one is suggesting the Federal Reserve starts to look at raising rates, the strength of the numbers does call into question as to whether the Fed needs to be buying as many bonds as it currently is on a monthly basis.

On the data front today we have the latest retail sales numbers for April, which will give yet another insight into the US consumer’s mindset at a time when the US economy continues to reopen more broadly, and more people are starting to travel.

It is notable that the US consumer has been much more resilient this year, helped in no small part by significant amounts of fiscal stimulus, while the recovery in the US jobs market has also helped.

In January we got another stimulus down payment in the form of a new $900bn stimulus plan that was agreed at the end of last year, thus prompting a big rebound in January retail sales of 5.3%, to a seven-month high, and while the February numbers saw a fall of 3%, the new stimulus payments that were signed off in March of $1.9trn, saw another big lift for March consumer spending, with the best performance since April last year, when the US came out of its first lockdown, rising 9.7%.

Today’s April numbers aren’t likely to be anywhere near as robust, with a consensus of around 1.1%, which seems pretty much in line given how well the US jobs market is going, however we could see an upside surprise given there is some evidence that not all the stimulus payments we saw in March have been spent yet.

Combined with the continued solid progress in the US vaccine rollout, consumer spending should remain strong, particularly since US theme parks started to reopen in April, and Airbnb also saw a big rebound in its bookings, which suggests consumers are feeling much more confident.

We also saw a big slide in Bitcoin yesterday, with the cryptocurrency closing at a two-month low below $50k, after Tesla CEO Elon Musk reined back his recent enthusiasm by performing an about turn on accepting the crypto token as payment for the company’s electric cars.

Forex snapshot

EUR/USD – has remained under pressure, and could well see further losses towards the 1.2020 area. A move below 1.2020 opens up the prospect of a return to the 1.1920 level. Resistance remains at the recent peaks at 1.2180

GBP/USD – found support just above the 1.4000 area which needs to hold to keep the uptrend intact. Below 1.4000 undermines and argues for a move back to 1.3920. While above 1.4000 the bias remains to the upside.  

EUR/GBP – found resistance at the 0.8620 area and the 50-day MA. While below the bias remains for a return to the lows this week and April lows at 0.8478.

USD/JPY – the uptrend remains intact while above the trend line from the January lows now at 108.15. A break above 109.70 argues for a move towards 110.20.  A move below 108.00 opens up the prospect of a move back towards 106.80.


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