Despite positive trading in Asia overnight, Europe is seen taking its lead from the US, which closed lower under the weight of a late sell off in Tech stocks and a large scale move out of Walmart (NYSE:WMT).
Wall Street closed lower for the first time in 7 sessions, after starting in the red but spending most of the session in positive territory. Consumer non-cyclicals were the biggest drag as investors dumped Walmart following disappointing results. Add in a late selloff in Tech stocks, higher US treasury yields and a stronger dollar and its clear to see that the indices were facing an uphill struggle. The Dow closed 1% lower, the S&P dropped 0.5% and the NASDAQ erased gains to close 0.07% lower.
Despite US equity indices closing the overnight session lower, the dollar moved higher, finding support in higher yields. The dollar closed higher for the 3rd straight session at 89.72, as it looks to make a move on the important psychological level of 90.00.
Earnings in focus on FTSE
The FTSE has had a disappointing start to the week, drifting lower as earnings failed to match to expectations. HSBC Holdings PLC (LON:HSBA) set the UK banking reporting season off on the wrong foot on Tuesday and investors will be hoping for a better performance from Lloyds (LON:LLOY) this morning. House builders, which have also been under strain over the past few session, will once again be under the spotlight as Barratt Developments (LON:BDEV) also reports today. The home construction sector has declined 4.6% over the past 5 sessions, making it the worst sectorial performer on the FTSE. A disappointing set of numbers from Barratt’s could see those losses extended.
Currencies in focus – UK wage data to boost GBP/USD over $1.40?
There has been little in the way of economic data for pound or dollar traders to digest in the early part of this week. This looks set to change today, as UK wage data and FOMC minutes come into focus.
UK wage growth data is due for release at 09:30 this morning. Expectations are for earnings growth to remain constant in the three months to December at 2.5%. Given that inflation is elevated at 3%, wage growth data takes on an even more important role in the eyes of the market. As inflation moved higher following the weakening of the pound, post Brexit referendum, wage growth hasn’t kept pace. This means that wages have actually been falling in real terms, squeezing the UK consumer, which in turn is leading to a slowdown in spending.
Negative real earnings growth is a key factor as to why the BoE has shown caution over raising interest rates. Hiking too quickly can actually dampen wage growth further, the opposite effect of what the central bank is looking for. Therefor investors will be watching the figures carefully to see whether the squeeze on the consumer is increasing or receding.
Should wages surprise on the upside, the possibility of the BoE raising rates in Spring increases, which at the moment stands at 65%. This would support GBP/USD and send it back over$1.40 towards resistance at $1.4025.
However, it is worth noting that wages have been at the highest level of 2017 for two straight months, meaning a slip lower could be on the cards. A weaker wage growth figure could point to the squeeze on consumers intensifying and reduce the possibility of a May rate rise. Under this scenario the pound could look to test support at $1.3950 before heading back towards $1.39.
Other Key Events
BoE Governor Mark Carney, along with MPC members Haldane, Broadbent and Trenreyo will take the hot seat, appearing before the Parliamentary Treasury Committee, to testify on the inflation report; an event which could also produce some market moving comments.
As if this wasn’t sufficient for GBP/USD traders, the US session will also bring FOMC minutes into play. Given the rising interest rate expectations, investors will be scrutinizing the numbers for any clues that the Fed could hike more than the planned 3 times in 2018.
Opening calls
FTSE to open 19 points lower at 7227
DAX to open 67 points lower at 12,420
CAC to open 27 points lower at 5262