While European markets were able to stave off a third successive weekly decline on Friday, US markets were not as they posted their worst run of weekly losses since the beginning of the year.
Equity markets looked set to end the week on a positive note on Friday after US retail sales saw a strong rebound of 1.3% in April. What was all the more surprising was the fact that a string of US retailers in the days preceding Friday’s number had painted a rather sombre picture of the retail outlook in their recent numbers, missing on revenues and profits, while at the same time offering a rather sobering outlook for the rest of the year.
The contrast with the official data could not have been starker but the numbers, once again raised the possibility that a Federal Reserve move on interest rates might not be such a distant prospect as first thought, in the process pushing the US dollar higher, and sending US markets back to their lowest levels since the release of the payrolls report the previous week. Despite the decent sales data a rate rise in June still remains a remote prospect, though Wednesday’s FOMC minutes might give an additional insight into any divisions on the committee, given recent hawkish comments from Fed officials.
Friday’s late sell off as well as some more disappointing Chinese economic data over the weekend is likely to see European markets open lower this morning, though with public holidays in France and Germany trading activity is likely to be light.
There had been an expectation after a late pickup in Chinese economic data in March that we were about to see a decent pickup in economic activity in April. This optimism looks like it may have been misplaced as first some disappointing PMI’s were followed by weaker than expected import and export data for April.
It wasn’t therefore too much of a surprise to see the latest industrial production and retail sales data also miss expectations. What was more worrying was the fact that both measures missed so badly with industrial production dropping back from 6.8% to 6% while retail sales also slowed from 10.5% to 10.1%, as the recent stimulus measures started to show signs of wearing out.
The drop in retail sales is particularly worrying given that they had been on an upward track since May last year and in the last couple of months the trend has reversed sharply from over 11% at the end of the last quarter of 2015. While there was a bit of a pickup in March this now looks like it was simply a Chinese New Year inspired spike.
Compounding concern about a flat lining economy fixed asset investment also slipped sharply falling back to 10.5%.
It’s likely to be a significant week for UK data with the release of the latest April inflation data tomorrow, as well as the latest unemployment, wages and retail sales data, later in the week.
For all the doom and gloom being bandied about by the competing campaigns in the EU referendum there is a concern that the rhetoric being employed could well cause the very slowdown in economic activity that markets are concerned about.
The unemployment rate, along with a slowdown in hiring are likely to be key indicators, though with employment levels already at record highs, any slowdown could simply be a symptom of a tighter job market.
EURUSD – the euro slid lower dropping below the 1.1350 area and throwing into doubt the prospect for further gains. This could well see a drop down the April lows at 1.1220 in the short term. A fall below here could well see a move towards 1.1030. We need to see a move back through 1.1430 to stabilise.
GBPUSD – having briefly fallen below the 1.4350 level we could see the pound fall back towards 1.4300 and even 1.4180, but we still remain in the short term uptrend since the lows this year. We need to see a move back through 1.4450 to stabilise.
EURGBP – still looks soft while below the 200 week MA and as such the bias remains to the downside while below 0.7950. A concerted move below 0.7860 could well target neckline support at 0.7760 from the March lows which, if broken could trigger a sharp down move. A move and close above 0.7940 retargets the 0.8000 area.
USDJPY – the US dollar is currently finding resistance at the 109.40/50 area. While we could well extend up to 110.20 the bias remains for a move back towards 107.80 and back to the recent lows at 106.80, with the 200 week MA at 105.30 the major support level.
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