European indices gain BoE rate unchanged Trichet hints at July hike

“European Indices traded higher on Thursday on the back of advances in the prices of mining and energy firms, with the latter tracking crude oil prices higher on supply concerns. British retail stocks were the worst performing sector however, falling 2% in trading weighed down by a disappointing set of results from the owner of Argos store, Home Retail.

The spike higher in crude oil prices has had a beneficial impact on energy firms, which in turn is supporting Indices. Brent Crude Oil has rallied over $3 in the last 24 hours with traders concerned about supply issues after OPEC failed to reach a consensus on raising production, an ill-timed scenario when taking into consideration the sharp fall of 4.85m barrels in US oil inventories announced some hours later.

A surprising narrowing of the US trade deficit also helped to support buyer demand for stocks across Europe and the US. The US trade deficit unexpectedly narrowed to $43.7bn from $46.8bn, when the market was expecting the trade gap to widen to just short of $49bn. March’s trade gap was also revised down from an original reading of $48.2bn giving stocks another positive. Much of the narrowing in the US trade gap was a direct influence of the Japanese earthquake and subsequent tsunami, which resulted in a drop of $3bn worth of imports from the country.

Retailers slump on Home Retail
Retail stocks have however been a key drag in Europe, with the UK and European retail sector both slumping 2% and 0.6% respectively, and the latter suffering its seventh straight day of falls.

Home Retail Group, Britain’s largest household goods retailer has been a key trigger behind today’s sector falls after the firm announced that sales at its Argos stores open more than a year fell by 9.6% in the 13 weeks to May 28th, a much more severe fall than expected with most investors predicting a slump of around 5.5%. The firm admitted that trading conditions had been more volatile and difficult than originally expected, particularly at its Argos stores. Today’s update from Home Retail Group adds to an already concerned sentiment regarding outlooks for Britain’s retailers in the midst of fiscal budget cuts and stubbornly high unemployment. The consequence of today’s trading update was to send Home Retail Groups shares over 12% lower, touching a new two and a half year low in the process.

Trichet says the magic words and indicates rate hike in July
Jean Claude-Trichet, the ECB President, uttered the magic words expected by most traders in today’s press conference; “strong vigilance” and by doing so convinced many in the market to expect an ECB rate hike in July. The words came after the ECB decided to hold interest rates at 1.25%, in a move widely expected by the market. However, with many traders already pricing in a July rate hike over the last few months, today’s reaction has been to lock in profits, forcing the euro lower by 0.5% against the US dollar. Today’s price action in the euro has therefore been a classic case of ‘buy the rumour and sell the fact’.

BOE keeps rates on hold, as expected
The Bank of England decided to maintain rates at 0.5% for the 27th consecutive month, in another move widely expected by the market. As a result, the reaction in the pound sterling was rather muted.