Europe Lower Ahead of Key UK Retail Sales Data

European indices are expected to open lower on Thursday following rough sessions in the US and Asia overnight.

People have spent the last week trying to explain why US indices in particular have suffered over the last week, with some pointing to growing expectations of a summer rate hike and others highlighting the weakness in the dollar during the same period.

However, neither of these really check out because, if anything, since the last meeting rate hike expectations have been pushed out a little further with September now being the earliest that the Fed is likely to consider it. This has primarily what has weighed so heavily on the dollar. And the strong dollar was being blamed the week before for weighing on US indices as it makes exports less attractive and was seen as being damaging to first quarter earnings.

What we’ve actually seen over the last week is a decoupling in the relationship between the dollar and US indices and I think this has more to do with quarter and month end rebalancing ahead of what is expected to be a disappointing earnings season, than anything else. The weakness in the dollar has persisted simply because it was overbought beforehand and rate hike expectations have been pushed back.

DXY vs S&P

*The above chart was taken from the Reuters Eikon terminal.

This all appears to have dented sentiment in Europe and Asia as well, although to an extent they are being supported by the loosening monetary policy being seen in both. In Europe, we’ve seen more of a stabilisation that an actual sell-off over the last week. European stocks are looking more attractive to investors since the ECB started its QE program due to the lack of yield on offer in the bond market. As a result, I think European stocks should be able to weather this storm without suffering much at all. Contrary to in the US, European earnings season could actually benefit from the weak euro and improvement in the economic data.

Saudi Arabia and its Gulf Arab allies have begun air strikes in Yemem against Houthi rebels who have driven the country’s Sunni President out of the capital. While there are few concerns that this will escalate into a larger war in the region that could have serious implications for oil prices, the risk has been heightened which is why we saw a small rally in Brent crude prices yesterday and may see a little more upward pressure in the coming days.

The conflict has the potential to act as a drag on oil supplies as most oil tankers from Arab producers must pass by the Yemen coastline in order to get through the Red Sea and Suez Canal.

Once again it isn’t going to be the busiest of days on the data front. The market will have high hopes for the Gfk consumer figure, released before the European open, following some very encouraging surveys from the eurozones largest economies recently.

UK retail sales will be monitored closely due to its importance to the UK economy. I don’t think we’ve seen the full benefit of lower oil prices on the consumer yet and therefore think sales could improve in the coming months and provide a real boost to spending ahead of the UK elections, although a small rise in prices recently may weigh slightly on sales at the moment.

The FTSE is expected to open 40 points lower, the CAC 22 points lower and the DAX 65 points lower.

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Craig Erlam

Craig Erlam

Senior Market Analyst - UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a Market Analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam