Stock markets had a relatively quiet session yesterday as there wasn’t any major news to influence sentiment in one way or another.
European stocks lost ground as Covid-19 case numbers played on traders’ minds. Several governments have tight restrictions in place in a bid to get a handle on the virus, which is having a resurgence. There isn’t much hope the restrictions will be lifted anytime soon. Governments are pushing out vaccinations but the process will be slow.
The declines that European stocks suffered yesterday were modest as there were reports that President-elect Joe Biden will announce trillions in stimulus plans this week. A significant portion of the gains that were racked up last week were on the back of stimulus hopes, so one could argue that a lot of the good news has already been factored into the price of equities. Mr Biden is keen to invest in infrastructure and green energy, but there are worries that the new administration will tighten regulation for the tech sector. Hence the NASDAQ 100’s underwhelming performance lately.
Stricter restrictions are being introduced in areas of Japan and China. The Nikkei 225 is up over 1% while stocks in mainland China are in the red. European markets are on track for a subdued start.
President Trump will face impeachment threats today. Lawmakers have requested that Vice-President Mike Pence invoke the 25th amendment, something he has already spoken out against. Should a majority in the House of Representatives press ahead to impeach Mr Trump, it will then go a Senate trial. The House vote will take place today.
Yesterday we heard from the Bank of England’s governor, Andrew Bailey. The central banker once again mentioned negative interest rates but this time he seemed to talk down the idea. Mr Bailey described negative rates as a "controversial" policy. In addition to that, he said it is too soon to consider any extra stimulus. Sterling gained ground yesterday as traders took the view the Bank won’t be going down that route any time soon or perhaps at all. UK banks are already suffering due to bad debt provisions connected to the pandemic. Lending margins have been squeezed too and negative rates would only put further pressure on lending profitability.
The dollar retreated from its three-week high posted on Monday. It was hardly surprising the greenback moved lower seeing as it rallied for four consecutive sessions. After European markets closed the greenback fell further. Gold was nudged higher on the back of the dollar’s dip. Copper and palladium enjoyed bigger gains as the metals would stand to benefit from Biden’s stimulus.
US CPI inflation is expected to tick up from 1.2% in November to 1.3% in December. The Federal Reserve is operating an extremely generous stimulus package as a way of trying to assist the economy. Inflation continues to be weak but that is not surprising. Running a loose monetary policy can bring about higher inflation but the Fed is content for the inflation rate to run above 2% for some time as they are keen to spur on growth. The core CPI reading is deemed to be a better gauge of underlying demand as it strips out commodity prices. Economists are anticipating the core metric to remain at 1.6%. The CPI reports will be published at 1.30pm (UK time).
Oil has witnessed a lot of volatility recently so today’s Energy Information Administration inventory report will be in focus. Oil stockpiles are tipped to fall by 2.55 million barrels, which would be the fifth consecutive weekly decline. Gasoline inventories are expected to rise by 2.8 million barrels. Brent crude and WTI set new 11 month highs yesterday.
The Beige Book update will be posted at 7pm (UK time) and it is likely to state the US recovery is holding up well but there are some pockets of weakness. The ISM non-manufacturing report for December grew at its fastest rate in three months. The services sector has largely seen its rate of expansion cool since July – which was a 16 month high. According to Statista, the services sector accounts for 77% of GDP, while Deloitte believes it to be closer to 70%. Manufacturing has experienced a sharper rebound but its accounts for less than 20% of total output, according to Statista. Last month the Fed made it clear they are happy to keep their policy on hold, which is likely to remain the case for the foreseeable future.
EUR/USD – yesterday it bounced back from the three week low that was set on Monday. If it holds above 1.2129, the broader uptrend should continue and it might encounter resistance at 1.2480. A break below 1.2129 could see it hit 1.2000.
GBP/USD – since late September it has been in an uptrend, last week it hit a 32 month high. If the positive move continues, it could target 1.3798. A pullback might find support at the 1.3429 area. A further pullback could target 1.3385, the 50-day moving average.
EUR/GBP – has been in a downtrend since mid-December and further losses might target 0.8864. Last Monday’s candle was bullish. A retaking of 0.9000 could put the 0.9100 area on the radar.
USD/JPY – hit a one month high on Monday but yesterday’s candle has the potential to be a bearish daily reversal. If it moves lower from here it could target 102.59 or 102.00. If the recent uptrend continues, it might encounter resistance at the 100-day moving average at 104.72.