Europe declines, FTSE 100 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 that are linked to hotter inflation is coming undone. The hawkish shift by the Fed has calmed nerves of the economy overheating.

FX 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. 

Oil declines but remains near multi-year high

Oil prices are edging lower on Friday for a second straight session. Formidable US Dollar strength following the Fed's hawkish shift is dominating the oil market heading towards the weekend. Despite the sell off in the latter part of this week, both oil contracts are set to end the week little changed and only marginally off two and a half year gains.

The bullish trend in oil remains intact, thanks to optimism surrounding the demand outlook. The Dollar may well be strengthening but the fundamental picture for oil hasn’t changed. The supply/ demand equation continues to favor the demand side meaning that any sell off will likely be short lived. Taking a longer view on the oil market, rate hikes are a headwind, but a lot can change between now and 2023!

Meanwhile, the near-term demand outlook continues to improve with international travel restarting. The EU has added the US to its list of countries allowing non-essential travel.

Gold rises but outlook remains weak 

What a difference a week makes!! This time last week Gold was knocking on the door of USD1900 and now it trades sub USD1800. Continued fallout from the hawkish surprise at the Fed meeting saw Gold lose another 2.3% in the previous session; putting losses for the week at 4.5%.  Gold is experiencing its worst weekly performance since March 2020. To say that the yellow metal has lost its shine would be an understatement. Alongside the prospect of tighter monetary policy and higher interest rates, the non-yielding, US Dollar denominated precious metal doesn’t stand much of a chance.

Gold has found support at USD1770 and is attempting to claw back at least a part of yesterday’s steep losses. If resistance at USD1790 holds then bears could gain traction again.