President Trump is playing hardball with China but seems to take it easy with Europe, deciding to delay tariffs on European automobiles by up to 6 months. The President's decision benefited the Euro that moved back above 1.12, also supported by the softer than expected US retail sales report. The Dollar gave up early gains when the consumer spending report was released and this new miss doesn't bode well for the US currency. Nevertheless, equities had a positive day, Gold remained unchanged below $1,300 and Oil advanced.
The US retail sales figures missed their mark once again and this is the third time consumer spending prints badly over the past five months. It becomes evident that the US consumer is not willing to spend more, amid a complex geopolitical environment, despite the strength seen in the labor market and the gains witnessed in equities during recent months. Does that signal that consumers are worried about the sustainability of the rally in stocks or a potential slowdown of the economy? It remains to be seen but what's true is that this could become a self-fulfilling prophecy: lower spending leads to fewer sales, meaning less growth in the economy and potentially more layoffs from companies in the US, which could eventually lead towards recession.
Meanwhile, the Euro was among the winners of the day yesterday, rallying higher when reports that President Trump will delay the auto tariffs on European imports by up to 6 months hit the wires. The decision is not formal yet but it should be made soon, providing some needed support to the shared currency. Does that change the outlook for the Euro though? We hardly think so. Even though Trump's decision to spare Europe for the time being may help slow down the decline seen during the past few weeks, the broader bias is not positive for the currency: Germany's fragile performance, the still unresolved Brexit saga and the overall risk-off sentiment seem to be capping the upside.
Furthermore, Friday's inflation report from the Euro area is another risk event for the currency. Inflation hasn't been moving higher in Europe for some time now and the ECB has no room to lower rates to stimulate prices growth. Such an environment brings forward the case for a more generous TLTRO program from the ECB in June, which will put more pressure on the European currency in the medium term. In the interim, today's Eurozone Trade Balance figures should come in positive, which may help the Euro hover around 1.12 in the short term.
Sterling broke below 1.29 over the past 24 hours amid speculation that pressure on Theresa May to resign is mounting. The British PM will meet with a committee of her party members today to discuss her future and with little progress on the Brexit talks and softer employment data earlier in the week, the bias for the Pound points lower. Prices are currently hovering around the 1.2850 area but negative headlines following May's meeting or speculation of an upcoming no-confidence vote could send the British currency towards the 1.2780 lows.
Gold attempted to break above $1,300 yesterday but stalled despite the miss in the US retail sales figures. This may be down to the relatively positive Dollar performance during yesterday's session: the risk-off environment helped the US currency remain afloat, even though the consumer spending figures printed badly. Having said that, with investors keen to find safe havens amid a re-escalation of geopolitical risks and US yields moving further to the downside, the bullish case for Gold remains valid. From a technical perspective, a break above $1,304 is needed to drive prices towards the $1,310 area.
Finally, equities had a positive day yesterday with Europe and the US advancing around 0.5% on average. However, futures are hinting on a bearish opening bell this morning and it becomes apparent that gains will be followed by losses on a daily basis while uncertainty persists. Clearly, the miss in the US retail sales data yesterday didn't go unnoticed: even if the Dollar itself remained largely unfazed, stock investors are looking at the data and see a developing string of bearish figures, which casts doubt over the odds of continued profitability for companies in the US and Europe.
MARKET EVENTS TO WATCH
- Eurozone Trade Balance - 1pm
- US Initial Jobless Claims - 4.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research