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Cautious start for Europe, as investors look to retail

The tailwind provided by Friday’s bumper US jobs report and more importantly the unexpectedly dovish comments from Fed chair Powell has moved into the new trading week, pushing Asia equities strongly higher and seen markets here in Europe open higher, despite ongoing evidence of continued economic weakness in some Asia markets.

The strength of Friday’s payrolls report, while strongly positive with 312k new jobs added in December, and the strongest wage growth in ten years at 3.2% did pose a conundrum for investors given that while the US economy continues to look strong it did raise further questions about additional US rate rises into 2019.

These were assuaged by Fed chair Jay Powell’s comments soon after the US market open which put a rocket under US stocks which had endured a torrid end to the year.  

His backtracking on balance sheet reduction being on auto pilot appears to have gone some way to persuading investors that the Fed has belatedly recognised that its current tightening strategy is posing significant risks to the global economy.

This change of tack along with some loosening of fiscal policy by Chinese policymakers could give some legs to the current rebound especially if it looks like medium level trade talks between China and the US don’t throw any obstacles in the way, as the trade tensions that were a hallmark of 2018 remain front of mind for 2019.

The US dollar has also slid back and as long as the Federal Reserve stays on point with its dovish change of tone then we could well see further falls in the greenback in the coming days.

European markets opened higher this morning with most eyes this week set to be on the latest updates from the retail space after a disappointing end to 2018 for the embattled sector. With bets against the sector rising sharply at the end of last year the potential for a rebound could be significant given that short positions in the sector have risen to 20%. Marks and Spencer in particular is set to be a key focus given it is the second most shorted stock on the market and is reporting later this week.

Last week Next PLC offered a ray of light to the sector after posting a better than expected pre-Christmas trading update, while John Lewis also cited some grounds for optimism. There is certainly some anecdotal evidence to suggest that shoppers left it very late to do their Christmas shopping with heavy trading at some supermarkets over the weekend before Christmas.

The updates continued today as Dunelm Group’s shares surged after the company posted its Q2 trading update, with total revenues up 9%, like for like sales up 5.7% with online sales rising 38%. The company also said it expected profit before tax to about £70m, though it remained cautious about the full year outlook, a sensible approach given the approaching deadline for the UK for leaving the EU.

Later this week we’ll get updates from Marks and Spencer, WM Morrison, Sainsbury and Tesco which could also surprise to the upside, given that this morning Aldi saw 10% growth in its sales numbers which came in just under £1bn. The big question here is how much did the two young upstarts of Aldi and Lidl steal the big four’s Christmas lunch.  

UK car sales are also in focus today after new car sales fell 5.5% in December. There has been a combination of factors around the slowdown here, including concerns around the future of diesel, while new emissions tests brought in at the end of last year have also affected demand. Brexit has been a factor but it has been one of many that has affected the European auto industry including concerns about tariff levels, which has impacted demand globally. Despite the doom and gloom it is important to remember that UK car sales were at record levels in 2016, helped in large part by some questionable financing deals. These levels of growth were never likely to be sustainable on a long term basis, and as such a slowdown was always likely.   

Oil prices have also continued their recent rebound from their December lows, helped by a weaker US dollar but also by the more positive sentiment around equity markets, as well as Saudi Arabia enacting its promise from last month to cut output.

US markets look set to open higher later today with the latest ISM non-manufacturing numbers for December expected to show a strong reading given Fridays strong growth in December payrolls.

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