European markets look set to pull back today

Good morning and happy Friday!

European markets look set to pull back today, following a somewhat tumultuous US session yesterday which saw the likes of the s&p500 tumble on the leaked news of a potential emergency press conference by Russia’s Putin. Despite being refuted later into the session, this highlighted the current fragility within the markets and that there appears to be significantly more threat to a downside shock than to the upside. Asian markets also suffered a tough overnight session, where the Hang Seng fell over 1.4% following the declaration of bigger than expected bad loans on the books of their banks. European markets are expected to open lower, with the FTSE100 -9, CAC -5 and DAX -20 points.

In Japan, the ongoing focus upon inflation was brought bang up to date, with the latest release of the Tokyo CPI reading; commonly viewed as the leading indication of nationwide inflation. The announcement that Tokyo’s prices rose 2.7% in April from a year earlier is thus a major step forward for Shinzo Abe and Abenomics. Being that this is the highest rate of inflation seen within Japan since 1992, I see it in two contradicting lights. Firstly, this major step forward no doubt shows that current measures and rates of asset purchases are adequate to push the country forward towards the goals set out by Abe back in 2012, thus threatening the notion that we could be set for a further increase in the near future from the BoJ. However, it also gives a significant amount of credibility to Abe and Kuroda to undertake policies as they see fit, given that they have managed to do something which no other leadership has achieved in 22 years within Japan. Ultimately, it is the national CPI figure excluding fresh food which is the target for a 2% long term rate, which at 1.3% remains some way from target. Yet with the ongoing impact of the sales tax feeding into higher prices, the pathway seems to be set towards higher price growth in Japan following years of deflation.

Ukraine fears came back to the fore yesterday, when rumours of an emergency presser from Putin sparked an immediate sell-off in risk assets. This came following the reported deaths of 5 pro-Russian activists within Eastern Ukraine. Ultimately, this proved a somewhat false dawn, with the press conference failing to come to light and indices gradually returning to the levels seen prior to the rumour. However, this proved an invaluable exercise in demonstrating the risks within the markets to the ongoing Ukraine conflict. In recent weeks, the market approach has been to disregard the ongoing fears of a civil war or a return to a cold war mentality between Russia and the west. In part, this shows the strength of the markets which seek to push higher despite a lingering threat of conflict. However, there is a clear threshold that is being respected, with any decision from Russia to move into Eastern Ukraine to step up their own military use in Ukraine likely to bring a sharp retraction in the markets. With today’s decision from Ukraine to stop the current ‘antiterrorist’ push owing to the activation of Russian troops on the border, it is clear that we could be nearing the moment that Russia does feel it has sufficient justification to intervene.

Looking ahead to today’s European session, the major event of note comes in the form of the UK retail sales figure due out this morning. The importance of retail sales has grown recently, with Mark Carney now including factors such as consumption into his ‘forward guidance 2.0’ policy. Thus there is a greater awareness of this already important figure as a gauge of both economic health and potential future monetary policy. However, despite Mark Carney’s new found interest in this figure, it is already one of the top indicators of economic health within the wider economy, representing both a quantitative and qualitative aspect of consumer activity. The quantitative side shows that the rate of retail sales growth is fluctuating more than ever in recent months, indicating an inconsistent sales environment for firms within which to work in. However, the quantitative side shows that in reaching the highest rate of month on month growth since 2009 back in January, people’s expectations for employment, wage growth, prices and economic growth are all improving to the extent that people are willing to spent money in the near term, safe in the knowledge that they will be financially secure going forward. In accordance with the usual fluctuations in this figure, we are expecting a figure around -0.4% on a monthly basis, however with expectations of around 3.8% on a year on year basis, there is a clear and strong growth in sales helping to carry the UK economy.