At the end of another choppy week for European markets sentiment appears to have become much more fragile, with the moves being seen in bond yields reflecting concern that we are heading for a growth slowdown.
US markets have also seen some heavy selling this week, with both the S&P 500 and Nasdaq 100 managing to hold above their lows from last week of 3,858 and 11,692, while still finishing the day lower for the second day in succession. Asia markets, on the other hand, have seen a strong rebound this morning after China cut its five-year loan prime rate by 15 basis points, for the second time this year. Consequently, European markets look set to open higher this morning at the end of yet another rollercoaster week for investors.
The one silver lining from the selling of the past two days was that we managed to close well off from last week’s lows, suggesting a general reluctance to become too bearish too quickly. That said, every single rebound we’ve seen since early April has seen a rebound shallower than the previous one, followed by a lower low.
One other thing that has also become clearer this week, has been a notable shift in tone in comments from US Federal Reserve officials, and appears to indicate rising concern about stickiness in current levels of inflation. Fed chair Jerome Powell’s comments on Wednesday do appear to be softening the market up for the prospect of more aggressive rate moves.
As we look ahead to today’s European open, we’ll be looking for further insight into the damage that a record 9% UK CPI inflation rate has done to the appetite for UK shoppers to go out and spend money, as the latest Gfk consumer confidence numbers for May fell to a record low of -40 in data released this morning, a truly sobering reflection of how much damage surging inflation is doing to consumer sentiment.
After a strong start to the year in January, UK retail sales have seen declines of -0.5% in February and -1.4% in March, battered by rising prices and consumer confidence back at levels last seen in 2008. The March decline was driven by a sharp fall in fuel sales, as the rising cost of living prompted consumers to pare back non-essential spending and drive their cars less. Not only that, but February was also revised lower, from -0.3% to -0.5%.
In cutting back on their spending, consumers will also have had one eye on the upcoming surge in energy bills, as well as other price rises, which were due to hit their wallets in April, and saw headline CPI rise to a record 9% earlier this week. The most recent BRC retail sales numbers showed that like-for-like sales fell 1.7% in April, so higher prices are certainly having an effect on spending patterns.
On the plus side, the Easter period may see a pickup on spending in travel and leisure, as consumers take advantage of the later Easter break, although with the various travel problems, that may not offer the lift it might have done in the past. Expectations are for a fall of -0.3% including fuel sales, however it wouldn’t be a surprise to see a much bigger decline.
EUR/USD – appear to be building a base at the 1.0340 area, but we need to see a move through the 1.0650 area to make things interesting and signal a move towards 1.0820. The bias remains for a move lower towards parity, while below 1.0650.
GBP/USD – moved up to the 1.2520 area with an area of support at the 1.2320 area, as well as the recent lows at 1.2150. While below the 1.2630 level the risk remains for a move bac towards 1.2000, on a break below 1.2150.
EUR/GBP – finding a bit of resistance just below the 0.8500 area, with stronger resistance at the 0.8520/30 area. Support remains down near the 0.8420 area.
USD/JPY – finding support just above the 126.80 area. This is a key support area, with a break below targeting 123.00. As long as 126.80 holds then a move towards the 135.00 area target remains intact.