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US stimulus boosts global sentiment, traders look ahead to ECB

The muted mood in government bond yields played a role in the rally enjoyed by stocks yesterday. 

In the past few weeks, rising yields acted as a catalyst to declines in stocks, while on the other hand, when yields have held steady or slipped, that has typically triggered the buying of stocks.

Yesterday was like a repeat of Tuesday, whereby eurozone stock markets outstripped the FTSE 100 as mining and banking stocks caused the British market to finish marginally in the red. Germany’s DAX 30 set a new record high, the CAC 40 and the FTSE MIB racked up respectable gains. A sense of optimism ran through the markets as the US’s planned spending scheme and the recovery were on traders’ minds.

Several hours after the end of European trading, it was announced that Congress backed the $1.9 trillion stimulus plan so it will be passed over to President Biden to sign off. The Dow Jones hit another record high, it closed above 32,000, following the announcement of the relief package.

The bullish sentiment from the US pushed up equity markets in the Far East, in addition to that, European stocks are poised for a positive start.      

The European Central Bank (ECB) meeting at 12.45pm (UK time) will be watched by traders. No change is expected to policy. The refinancing rate and the deposit rate are tipped to remain at 0.0% and -0.5% respectively. In December, the ECB boosted the pandemic emergency purchase programme (PEPP) by €500 billion to €1.85 trillion so they will be in no rush to carry out another tranche of easing anytime soon.

Earlier this week it was confirmed the eurozone economy contracted by -0.7% in the final quarter of 2020. Keep in mind, the US and the UK grew by 4.1% and 1% respectively in the same period. The services sector accounts for approximately 70% of output in the euro area. The eurozone services PMI reports have been experiencing negative growth in recent months so it is possible a recession is on the cards. On the bright hand, manufacturing is showing respectable growth but it equates to roughly 14% of economic output.

In light of the tough restrictions that remain in place in many eurozone countries, the outlook in the near-term is not encouraging. To make matters worse, the vaccination rates in Germany, France and Italy are around 9%. In stark contrast, the UK’s rate is approximately 35%, so it is far closer to re-opening its economy. It must be pointed out the ECB has been aggressive with respect to providing support to the area, while the protracted response from the EU hasn’t done the region any favours. Last summer the bloc decided upon a €750 billion rescue package, of which only €390 billion are grants. Lately, government bond yields saw a few spikes. Although it is not a serious issue at the moment, should that trend continue, it could be a problem for indebted countries like Greece, Spain and Italy. The ECB’s press conference at 1.30pm (UK time) could provide an insight into the thinking of the policymakers. Yesterday the EUR CMC index fell to its lowest level since July, but that has more to do with the rebound in the US dollar and the pound. A softer euro makes life easier for the ECB so they will want to keep it that way.

Yesterday’s US inflation report was interesting as the headline figure for February jumped to 1.7%, meeting forecasts, but the core reading undershot the consensus estimate by slipping to 1.3%. The news removed some of the fear in relation to US inflation – which fuelled the recent upward moves in US government bond yields. Now that it seems that inflation won’t be too much of a worry in the near-term that could act as a cap to the US dollar, and as a floor to equities as well as gold.

The adverse weather that was seen in Texas recently still appears to be impacting refining as the EIA report showed that US oil inventories jumped by 13.79 million barrels – oil refineries are slowly coming back on stream. In the same update it was revealed that gasoline inventories dropped by almost 11.9 million barrels, so that counteracted the oil data, hence why WTI and Brent crude closed higher last night.     

EUR/USD – while it holds below the 50-day moving average at 1.2111, the recent bearish move should continue, support might be found at 1.1800. A break above 1.2242 should bring 1.2349 into play.

GBP/USD – since late September it has been in an uptrend, it hit a 34 month high last month. If the positive move continues, it should retest 1.4241. A pullback might find support at 1.3773, the 50-day moving average.   

EUR/GBP – has been in a downtrend since mid-December, last month it dropped to an 11 month low, and further losses might target 0.8400. A rally above 0.8730 should put the 0.8800 area on the radar.   

USD/JPY – has been in an uptrend since early January, this week it hit a nine month high. If the positive move continues it could target 109.85. A pullback from here could find support at the 108.00 area or 105.50, the 200-day moving average.