US retail sales take a knock as oil drives the FTSE 100 lower


The FTSE 100 is the worst performer in the European equity space so far today as it faces a perfect summer storm of a stronger pound, weak energy prices and some notable under-performers including Debenhams. Not even a government announcement of investment in the aerospace sector, can boost the index. However, the aerospace news may have protected the FTSE 100’s industrial sector today as it has suffered the smallest losses so far, however, the investment news has barely made any market impact.

The £343m in investment is a sweetener for aerospace bosses who are concerned about the UK’s investment potential after Brexit. This is a decent size of investment, however, with so much political uncertainty over the eventual outcome of Brexit, this commitment from the UK government may not be enough to boost sentiment in the sector or the wider FTSE 100.

Brexit rhetoric starts to heat up again, but impact muted

After a quiet weekend on the Brexit front, the rhetoric is starting to heat up again. The prospect of a second referendum has been quashed by a government spokesman, while Brexiteers have given Theresa May another ultimatum to tear up her Brexit White Paper or face a mortal threat to her premiership. This is becoming a very common occurrence, and we aren’t convinced that the latest news is driving sentiment towards UK asset prices today. We believe the stronger pound, GBP/USD is at its highest level in a week, is much more detrimental for the FTSE 100 in the short term and not squabbling politicians.

For stock market bulls, we think that today’s move in the FTSE 100 could be a classic Monday performance, where the markets go one way, only to reverse course on a Tuesday. Theresa May is still in power, the oil price isn’t disastrous, and even though Debenhams slipped to its lowest ever level on the back of reports of reduced credit cover, the company is claiming that it has enough cash to keep it solvent. Added to this is investor immunity to another story of woe for a UK High Street retailer, which is hardly news these days. The one weak spot for the FTSE 100 is the energy sector now that the US Treasury has announced that it may allow importers to buy Iranian crude oil, which could weigh on energy prices for some time and keep the pressure on the commodity producers like BP.  However, it is worth noting that volatility indicators for the FTSE 100 remain muted, suggesting that there is no panic and today’s losses may not be repeated, but be wary of the UK energy sector.

Trump’s foes could fight back

On the back of everyone’s minds is the latest news from President Trump, he called the EU America’s biggest “foe”, ahead of Russia and China. Considering how the Trump administration has treated China, imposing $200bn of tariffs on Chinese exports, what has the President got up his sleeve to punish Europe? This could be a slow burner, and we don’t expect a raft of trade tariffs on EU goods or a declaration of war to settle scores with America’s newest foe. The lack of concern is reflected in the FX market, the euro is higher against the dollar today, however, European stocks are taking more of the heat, with energy and discretionary consumer stocks the weakest performers in the Stoxx 600.

China is another concern for investors. The quarterly data matched expectations with GDP coming in at 6.7% for Q2, and the Chinese Government’s 6.5% growth target for 2018 still on track, added to this, rebalancing towards a consumer-led economy is continuing. However, concerns arise because of fears of a slower pace of decline in H2, with the slowdown in credit expansion, a crackdown on shadow banking and the US Trade war hitting exports, all likely to weigh on growth in the coming months.

Corporate Earnings: the Gift that keeps on giving

Trumping all of these market influences is corporate earnings, which continue be positive, even if US futures point to a flat to negative open today. Bank of America reported a stunning set of results earlier. BoA is one of the best performers ahead of the market open after the bank reported earnings of $0.64 beating estimates of $0.57. The glow from these results may not last long, however, as the 33% boost to net income actually came from tax code changes (BoA execs must be hoping for a second Trump term!) and $700m of cost cutting. While equity and FI business improved, investment banking fees were lower, in contrast to its peers at Citi and JP Morgan. This could leave BoA trailing its rivals once the dust settles.

Is the US consumer flagging in the summer heat?

US retail sales were weaker than expected, headline sales were in line at 0.5%, while ex auto and gas sales were 0.3% for June, vs. 0.8% in May. Retail sales can be volatile, so we will need to see how the next few months pan out. We don’t think that this data will fundamentally impact Fed Chair Powell’s testimony to Congress later this week, but it does suggest that the US consumer can’t be relied on even though credit is plentiful (according to BoA’s conference call) and unemployment remains at a record low.

So, as we start the week some themes are developing: China growth fears, Trump’s diplomatic hand grenades, Brexit fears and the potential for a weaker US consumer. As we mentioned earlier, US earnings growth is a bright spot in an otherwise cloudy landscape.

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