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The Early

18 Dec 2018 07:19

Markets: retail breakdown

As long as the bottom-up company news echoes the top-down macro concerns, it will be tough for equity indices to form a reliable base. The thumping profit warning from ASOS -38% started Monday off in ugly fashion and European markets never really recovered, although the worst of the losses were trimmed slightly in the final hour. By the close in the UK the read across for the general retail sector left it lower by -3.6%. Electricity -2.7%, food producers -2.6% and food retail -2.3% were other notable underperformers, with mining +1.5% the only area of resilience. Another grim day for mid/small caps left 11 of our 12 PHySiCS sectors lower, notably retail -3.3%, oil & gas -2.1% and media -1.9%. The PM's confirmation that the delayed vote on the Brexit withdrawal agreement will take place before 18 January helped the pound to firm marginally.

The wider European retail sector also suffered, losing -2.6%, as Zalando -12% and H&M -8% were among those suffering the worst of the negative read-across. The Euro Stoxx financials group also struggled -1.5%.

Overnight. No respite in the US session, which ended with the S&P at a 14-month low and the Russell 2000 small cap benchmark in bear market territory, after a heavy volume session; the VIX jumped to a seven-week high. There were close to 2000 new 52-week lows across the NYSE and NASDAQ exchanges. The consumer discretionary group echoed declines in Europe losing -2.8%, and major health care and financials stocks were also under pressure. Asia again followed the lead lower as tomorrow's Fed statement assumes growing importance; the US dollar eased slightly. US WTI crude touched a 15-month low below $50/bbl. Europe will open down once again.

Early numbers. Dow -2.11%, S&P -2.08%, NASDAQ -2.27%, VIX 24.52; US 10-yr 2.85%; Nikkei -1.82%, Hang Seng -1.14%, Shanghai Comp -0.83%; £=$1.2624, £=€1.1128, Brent $58.56/bbl, Gold $1246.00; FTSE 100 indication -41 (at 6.35 UK).

Macro: feeling the pinch

Markit's UK Household Finance Index for December showed some cracks in previously resilient consumer confidence. The headline reading of 43.9 was at a six-month low due to combination of a faster increase in living costs and a weaker rise in income from employment. Households are also more cautious about the outlook for property prices, and prospects for their own finances over the next 12 months.

The ECB continues to struggle to generate inflation across the Eurozone. The final estimate of regional CPI for November showed the headline rate revised lower to +1.9% YoY, and the key core rate (excluding energy and food) still running at just +1.1% YoY. There was some better news on the Italian budget front as reports emerged suggesting a new fiscal package has been agreed that will be more palatable for the EU, although the details remain elusive.

Ahead of the Fed meeting, some more hints emerged of a softer US economy. The NY Fed's Empire State manufacturing index fell by more than expected to 10.9 in December (from 23.3), an 18-month low reflecting primarily a weaker new orders picture. The NAHB also released its housing market index for December which, at 56 (from 60) was the lowest since May 2015.

Japan cuts its official forecasts for growth and inflation, with GDP now projected to expand by just +0.9% YoY in fiscal 2018 to March, and CPI expected to increase by +1.0% YoY.

Today's events. Germany Dec IFO survey (9.0) 101.8; US Nov housing starts (1.30) 1.23m.

Ian Williams
Economics & Strategy
020 7418 8819

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