‘Wait And See’ Mode In European Markets
The FTSE 100 spent most of Wednesday trading back and forth around the flat line. The bullish fever that catapulted shares to a new record high on the first day of trading in 2017 was more tempered by day two.
Disappointing Christmas sales figures by high street and catalogue retailer Next as well as strength in the British pound, a negative for multinational earnings, weighed on UK investor sentiment. The scheduled release of the minutes from the December meeting of the Federal Reserve after the European market close meant there was an element of “wait and see” going on.
Trump Driving Automakers From Mexico
Optimism that Federal Reserve minutes will offer a positive outlook for the US economy helped stocks on Wall Street creep higher on the open. Automakers were again in focus thanks to interference from Donald Trump and the release of auto sales data for December. Ford Motor (NYSE:F) shareholders had reason to celebrate after vehicle sales in the US unexpectedly rose in December while the car maker scrapped plans for a new plant in Mexico, clearly taking guidance from the President-elect.
Next Trips While ‘Walking Up The Down Escalator’
Shares of Next fell out of the shopping basket after reporting an annual drop in Christmas sales. An increase in online sales was not enough to offset declines on the high street. The declines came on top of losses seen on Tuesday following a report showing a sharp decline in footfall at British shopping centers. Shares of Next PLC. (LON:NXT) lost around a third of their value in 2016 and 2017 isn’t shaping up to be much better.
It’s tempting to think the worst may be over for Next as its valuation drops to a more attractive level but this cheap stock could get cheaper. The shift in consumption patterns and difficult weather that led to falling sales in 2016 didn’t even factor in the expected impact of rising import costs from a weaker British pound. We remain bearish on Next for the first half of 2017 with some recovery possible in H2 as retailers pass on higher costs to customers with higher prices.
Rising Eurozone Inflation Not Reflected In Euro
From a purely Eurozone economic data perspective, the euro is undervalued. In December 2016, Eurozone inflation rose to its highest in more than three years (CPI +1.1% y/y). Growth looks to have risen in the fourth quarter too. Surveys of the services and manufacturing sectors indicated the fastest output growth in five-and-a-half years.
The euro rose against both the pound and the dollar on Wednesday but gains did not reflect the brighter outlook for the economy. The Eurozone continues to lag the UK and the US in both growth and inflation but the latest data suggests its closing the gap. The likelihood of hawkish minutes from the Federal Reserve pointing to further US rate rises contrasted with the extension of quantitative easing by the ECB means euro bulls are few and far between.