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France, Germany set to contract in Q4, as choppy month draws to a close

After initially opening lower yesterday, European markets recovered some of their poise in the afternoon session as the washout from Wednesday’s GameStop margin call continued to generate ripples through the market.

Various trading restrictions on some of the most popularly shorted stocks prompted a halt to the sharp rises seen on Wednesday, while US markets also managed to find a floor and recover after posting some of the biggest losses in three months. While the main focus remained on GameStop, the airline sector became a focal point after American Airlines surged sharply on the US open, after it was identified on Reddit as the most heavily-shorted US airline stock. This surge in US airlines prompted a similarly sharp snapback in European airline stocks with the likes of easyJet, IAG and Lufthansa all posting strong gains.

Not unexpectedly, all of this volatility has attracted the attention of not only the regulators, who appear content to remain watchful for now, but also politicians on Capitol Hill, who are keen to score political points, and were keen to criticise some of the trading halts that were seen yesterday. Nonetheless it is clear that US politicians will want to have a look at the events of the last few days in order to discover what exactly went on, as GameStop closed down 44%, its first decline in six days.  

As we look ahead to today’s trading session and the end of the week, as well as the month, European markets look set to open lower as we reflect on what has been a very choppy start to the first month of trading in 2021, as the initial euphoria at the start of January has given way to concerns about extended lockdowns and tighter restrictions for longer across Europe, with the added worry of rising volatility prompting some de-risking into month end, as the battle between Main Street and Wall Street starts to gain political scrutiny.

An added concern is the prospect of a slower vaccine rollout, as well as disruption to vaccine supplies, as the EU weights the prospect of export controls on vaccine supplies, thus raising the political temperature among those who have managed to coordinate their vaccine rollout programme better. In a separate development, European Council president, Charles Michel, even raised the prospect of seizing control of vaccine production in an attempt to get its own botched vaccine programme back on track, after parts of Spain, France and Germany ran out of vaccine supplies.   

We’ll also get our first look at how the French and German economies performed in Q4 as we get the first indications of GDP growth in a quarter characterised by a slow tightening of restrictions from very early on the quarter. Both France and Germany went into varying different states of lockdown from 1 November, and even before that it was fairly evident that neither economy was doing particularly well, having seen a decent rebound in Q3.  

We’ve already heard from ECB president Christine Lagarde this week that the ECB expects the euro area economy to contract in Q4. The French economy is expected to contract 4%, a sharp reversal from the 18.7% rebound seen in Q3. These numbers will be quickly followed by the latest Germany GDP numbers which are expected to slip from 8.5% in Q3, to 0% in Q4, with the country’s manufacturing sector expected to save it from a negative quarter.

We’re also seeing some important US economic data after yesterday’s Q4 GDP numbers which saw an annualised rise of 4%, down from the 33.4% gain seen in Q3. A sharp fall in the level of personal consumption from 41%, to 2.5% was behind most of the slowdown seen here. This is expected to be borne out by today’s latest personal spending and income data for December. The weak retail environment is expected to show a 0.4% decline in personal spending for the second month in succession, a really disappointing number given that this period covers Thanksgiving and the Christmas period.

Another sharp decline in US weekly jobless claims yesterday to 847k from 914k, suggested that the big spike in claims at the beginning of this month may well have been a temporary phenomenon, and with new stimulus cheques coming down the pipe, the outlook has started to look a little more promising ahead of next week’s January payrolls report.  

It has been a decent start to the year for the pound, being the best performing G8 currency against the US dollar as it closes in on the 1.4000 area, a performance which may have acted as a small drag on the FTSE 100, after it hit a nine-month high in the first week of the year. The outperformance of the pound has also seen it gain against the euro, and appears to be down to what is now being called the “vaccine trade”, as the speed of the UK vaccine rollout is prompting some optimism that the UK economy might be able to come out of the other side of the pandemic much earlier than its European peers.

There is still plenty that might go wrong, given that the UK economy is coming from a much darker place, and the politics from the EU side over their lacklustre vaccine performance, a potential headwind which might cause problems of a different nature.    

EUR/USD – held above the 1.2040 level prompting a rebound, however we need to overcome the 1.2190 area to overcome the downside bias. A move below the 1.2040 area has the potential for a move towards the 1.1980 area initially on the way to the 1.1800 area.

GBP/USD – easily held above the 1.3600 area yesterday, rebounding back to this week’s peaks. The move towards 1.4000 remains on the cards while above the 1.3600 area, but we need to push through 1.3760.  

EUR/GBP – squeezed back towards the 0.8890 area yesterday before slipping back, with broader resistance back at the 0.8920 area. While below here the bias is for further losses towards the 0.8780 area.

USD/JPY – the US dollar continues to edge higher but we need to take out the 104.50 area to move higher. A failure to do so could see us slip back towards 103.70. A move above 104.50 targets the 105.20 area. 

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