Europe set for lower open, ahead of US Retail Sales

While the early year volatility continues to support markets in Europe, with another decent finish for the FTSE100 and DAX yesterday, the moves in US markets continued to be dominated by increasing volatility as well as some bearishness, with weakness in tech stocks prompting a wider sell-off as US markets closed sharply lower.

The Nasdaq 100 led the way, rolling over after European markets had closed, posting its lowest daily close since October last year, and wiping out all of its gains from the last three days in the process.

US yields also fell back in what looked like a classic risk off/safe haven move, as investors piled into government bonds, although a slightly weaker than expected December PPI report may well have also played a part.

Crude oil prices also slid back, with a firmer US dollar taking some of the heat out of the recent rally.

Asia markets have also rolled over, with today’s China trade numbers for December showing that the Chinese economy continues to feel the effects of the problems caused by the government’s insistence on a zero-covid policy, although economic activity has picked up somewhat after the problems caused by the shutdowns and power cuts in September.  

Exports came in at 20.9%, slightly above expectations, helped in no small part by the massive demand being seen for Covid tests around the world due to the explosion of cases caused by the Omicron variant.

Imports came in at 19.5%, a sharp fall from the big rise of 31.7% seen in November, which was driven by higher demand for coal and copper imports, as industries played catchup after the earlier shutdowns. The weakness in imports would appear to point to continued weak domestic demand in a Chinese economy which is clearly struggling.  

Because of the weakness in US and Asia markets today’s European open looks set to be a weaker one, with the focus on US retail sales for December, where we’ll see how much of an impact the Omicron outbreak has had on consumer demand before Christmas.

If the recent credit card spending data from Visa is any guide, then we could see a decent number for retail sales, after its Spending Momentum Index posted its best ever reading in December.

The US consumer has shown a fair degree of resilience during the last quarter of 2021, despite consumer confidence that has started to struggle.

Since August, US retail sales have seen four successive months of gains, although in November this only translated into a 0.3% rise, compared to an October gain of 1.8%.  

The November number was a little disappointing, however it became clear from looking at the numbers that a lot of US consumers brought forward their pre-Christmas spending due to supply chain concerns into October, which saw a big revision higher, while November slowed sharply.

More worryingly on the control group numbers we saw a decline of -0.1%, which suggests that December might see a similarly weak reading, given the tighter restrictions imposed across a number of US states during December, due to Omicron outbreaks.

Expectations for today’s numbers are for a decline of -0.1%, due to US consumers staying at home and avoiding crowded spaces, in order to be certain that they get to see their families over the Christmas and New Year period. Nonetheless the Visa spending index suggests a different story on the spending front, so we’ll just have to wait and see.

Before that we get the latest look under the bonnet for the UK economy, with the latest monthly GDP numbers for November, which are expected to see a decent pickup of 0.4%, after a disappointing October GDP report, which came in at 0.1%.  

The October number was especially disappointing given that the index of services saw a big contribution of 0.4%, which came in line with expectations.

The main drag was some big falls in industrial production and construction output which fell 0.6%, and 1.8% respectively, largely due to delays and disruptions caused by supply chain difficulties. We should see a bit of a rebound in these numbers for November, with industrial and manufacturing production both expected to rise by 0.2%.

Index of services for November is also expected to show a rise of 0.5%, which suggests that the 0.4% GDP estimate might be a bit on the low side.

Today’s November numbers will also be an important benchmark in determining how well Q4 is likely to be for the UK economy and whether it can avoid a sharper slowdown given that the December numbers are likely to be extremely poor, given the impact of Omicron Plan B restrictions in the leadup to Christmas.   

EUR/USD – Now we’ve moved through the 1.1385 area, momentum has shifted a touch, and we could see further gains towards 1.1520, and potentially higher to 1.1605. Support now comes in at the 1.1385 area, with interim support also at 1.1410.   

GBP/USD – Tested and failed at the 200-day MA, falling back from 1.3750. We need to break above here to signal further gains towards 1.3830 initially, and on toward the 1.4000 area. Support remains at 1.3420 and last week’s lows.

EUR/GBP – Currently ranging between the support at the 0.8330 area, and resistance at the 0.8380 level. The bias remains lower towards 0.8280 and the 2020 lows, while below 0.8380.

USD/JPY – Continues to look a little soft having broken below the 114.70 area and could well see a move towards 113.70 cloud support. The 114.80 area should now act as resistance.

FTSE100 is expected to open 38 points lower at 7,525.

DAX is expected to open 116 points lower at 15,915.

CAC40 is expected to open 56 points lower at 7,145.