FTSE falls as retail sales drop, oil declines

Europe heads for a mixed start despite strong gains on Wall Street. Falling oil prices and signs of rising prices hitting the UK consumer weigh on the FTSE.

• Falling oil prices & strong US data helps Wall Street close higher
• The FTSE falls after UK retail sales unexpectedly drop 
• German IFO business climate data expected to show a deterioration in sentiment

While European bourses finished yesterday’s session in a mixed fashion, with the NATO meeting in focus, Wall Street was much more decisive, finishing the day with firm gains.

President Biden’s diplomatic marathon in Brussels saw NATO agree to deploy more troops to eastern Europe and warned Russia on using chemical weapons. EU leaders and Biden also imposed more sanctions on Moscow. The oil market breathed a sigh of relief as the European Union remains split on imposing an oil embargo on Russia.

Oil dips without energy sanctions

Oil prices fell over 2% yesterday following the meetings, with the price also being dragged lower by the US and its allies considering releasing more oil from strategic reserves, which helped ease supply fear slightly. 

The decline in oil prices has helped calm inflation fears, which along with upbeat data, boosted risk sentiment, sending Wall Street to close higher. US PMI data showed that business activity rose to an eight-month high in March, lifted by strong demand for both goods and services. 

Jobless claims also fell to the lowest level since 1969, highlighting the tightness in the US labour market. The strong data indicates that the US economy can handle the more aggressive path to monetary tightening that the Fed has expressed the need for this week.  The NASDAQ outperformed its peers, closing up 2.2% on the day.

UK retail sales slip

Today European bourses are heading broadly lower. The FTSE is set to underperform after weaker than forecast retail sales. Sales unexpectedly fell -0.3% MoM in February, after surging 1.9% in January. 

UK inflation was at 6.2% in February, its highest level in 30 years. Rising prices are reducing households’ disposable income creating a squeeze that is already being reflected in retail sales. With energy, food, and fuel prices rising and inflation expected to hit 8% in April and maybe even double digits in October, this squeeze will only worsen. Falling disposable income coupled with deteriorating consumer confidence means this year could be another challenging year for retailers.

European indices

The FTSE has seen a steep rebound from its 2022 low of 6760 before running into resistance around 7520. The price has since eased and is consolidating around 7450, supported by the 50 SMS at 7420.

Like the FTSE, the DAX has been in consolidation mode this week. German PMI data yesterday showed that business activity slowed slightly in March but was stronger than expected and ahead of forecasts. However, there are clouds on the horizon as rising prices dampen the outlook. 

Looking ahead, the German IFO business climate index is also expected to show a deterioration in sentiment. The IFO index is forecast to decline to 94 in March from 98.9 in February due to rising prices and the Russian invasion of Ukraine.