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Europe declines, FTSE under-performs and UK retail sales slump

European stocks are heading lower after a mixed close on Wall Street. The fallout from the FOMC continues to act as a drag, whilst weaker than forecast UK Retail Sales data adds to the downbeat mood.

UK Retail Sales declined in May as the euphoria felt from shops reopening in April shifted to higher spending on eating out in May, as indoor dining reopened. Retail sales declined 1.4% MoM in May, after surging 9.2% in April. Expectations had been for a 1.6% rise.

The figures are slightly disappointing, but retail sales are volatile and even more so now as the economy is re-opening. After April’s immensely strong read, a softer May, particularly given the awful weather and the re-opening of inside hospitality isn’t so surprising.

Retailers will be hoping that April wasn’t the end of the pent-up demand. Given how hard retailers have been hit across the past year, they will want to see elevated sales from pent-up demand continuing for a while longer. It will take more than one strong month to even start making inroads into the damage caused by the lockdown this year, let alone last year. Still, I don’t think the weaker sales reflect falling consumer sentiment, it’s more likely that households opted to enjoy spending in restaurants and services over goods.

Commodity stocks remain under pressure amid the stronger US dollar. Oil and base metal continue to decline with oil majors and miners tracing the commodity prices lower.

Looking ahead to the US open, futures are climbing higher with the tech-heavy Nasdaq once again looking to out-perform. The Nasdaq closed out on Thursday 0.87% higher, whilst the Dow closed -0.6% lower. High growth stocks are back in favor over cyclicals and value, suggesting that the reflation trade is unwinding. That rotation into value and into stocks which are linked to hotter inflation is coming undone. The hawkish shift by the Fed has calmed nerves of the economy overheating.

USD extends gains, GBP slumps on weak data

The US dollar is edging higher, trading at two and a half month highs as the greenback continues to feel the support of the hawkish Fed. With little else on the agenda, investors continue to digest the Fed’s message and what it means for the US dollar outlook. With the Fed’s dovish narrative coming to an end, the outlook for the US dollar has improved significantly. Reflecting this more upbeat outlook, the US dollar index trades above its 200-day moving average after jumping 1.5% across the week.

Elsewhere in the FX markets, GBP/USD is lagging behind its major peers, weighed down by weak retail sales data and US dollar strength. Rising Covid cases and the ongoing Brexit issues are adding to the negative tone surrounding sterling. The pair has lost 1.45% this week, falling below the key psychological level of 1.4000, and even 1.3900 is looking unstable.

For a look at all of today’s economic events, please check out our economic calendar at www.marketpulse.com/economic-events/

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