Stock markets in Europe as well as the US bounced back yesterday, as traders went bargain hunting in the wake of the heavy losses sustained on Friday.
Equity markets in mainland China reopened yesterday after the extended holiday period. The major equity benchmarks in China’s mainland slumped on the open as traders rushed for the exit on account of the coronavirus situation. Chinese stocks closed off the lows of the session partly because the central bank intervened - by adding liquidity in a bid to ease traders’ fears.
Traders in China were playing catch-up with the rest of the world. The fact the Peoples Bank of China stepped in, indicated they are willing to assist the economy, and that helped sentiment in Europe. The gains that were posted in Europe yesterday were small by comparison to the major declines on Friday, so the real test will be weather the positive sentiment will last.
Overnight stocks in mainland China rebounded a little as the dust settled from the panic selling witnessed yesterday. Traders are clearly still fearful as the gains achieved pale in comparison to losses incurred on Monday.
The Reserve Bank of Australia kept rates on hold, meeting forecasts. The Australian central bank are committed to keeping rates low in an effort to ‘reach full employment and achieve the inflation target’.
Wall Street enjoyed a rally yesterday too as traders swooped in and picked up relatively cheap equities. The positive sentiment in Europe helped US markets get off to good start, and the respectable manufacturing reports added to the bullish move. The final manufacturing PMI and the ISM manufacturing PMI readings were 51.9 and 50.9 respectively. Both readings topped forecasts as well as showing improvements on the months.
The final reading of the manufacturing PMI reports in Italy, France, Germany and the UK were 48.9, 51.1, 45.3 and 50.0 respectively. The levels of activity aren’t impressive but at last they are showing signs of improvement.
The pound took a battering yesterday on account of the firm stance Prime Minister Johnson took in relation to negotiating with the EU. Mr Johnson, said he would talk away from any talks if the EU insisted the UK would need to follow their rules once the transition period had ended. The announcement by Boris Johnson sent the pound tumbling as traders became fearful it would open up the possibility to a no-deal scenario post the transition period. It is worth noting the pound was coming from a position of relative strength, so the update from Mr Johnson provided a nice excuse to cut some long positions.
Oil tumbled yesterday on fears the health crisis would dampen demand in China. It might have been back to business yesterday for the stock market in China, but there are still several industrial provinces in China that are on extended holiday on account of the coronavirus, so traders are worried the nation’s appetite for oil will dwindle It was reported that OPEC+ are exploring the possibility of curtailing production by 500,000 barrels per day in a bid to stem the fall in the oil market. It says a lot about sentiment when talk of a production cut can’t prevent WTI falling from below the $50 mark.
At 9.30am (UK time) the UK construction PMI reading will be posted and economists are expecting an improvement from 44.4 in December to 46.6 in January.
Eurozone PPI will be posted at 10am (UK time) and the reading is expected to improve to -0.7% from -1.4%. Keep in mind, last week the headline CPI rate in the currency area ticked up to 1.4% from 1.3%. Any major change in the PPI rate is likely to trickle down to the CPI rate.
At 3pm (UK time) the US will announce the factory orders report. The consensus estimate is 1.2%, which would be a turnaround from the -0.7% posted in November.
EUR/USD – has been pushing lower since late December and while it holds below the 50-day moving average at 1.1094, the bearish move might continue. Support might be found at the 1.0900 area. A break above 1.1172 should pave the way for 1.1249 to be retested.
GBP/USD – sol-off sharply yesterday but while it holds above the trend line from the late December lows, the broader positive trend should continue. A break above 1.3284 should pave the way for the 1.3500 area to be retested. A break below the trend line might find support at 1.2900.
EUR/GBP – surged yesterday but while it holds below the 0.8600 mark, the broader bearish trend is likely to continue. A drop below 0.8387 might bring 0.8276 into play. Resistance might be found at 0.8600.
USD/JPY – has been pushing lower recently and while it holds below the 50-day moving average at 109.19, the bearish move should continue. 107.65 might act as support. If the wider positive trend resumes, it might retest the 110.00 zone.