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Europe poised for quiet start following yesterday’s bullish session

Stock markets roared yesterday as the US Senate signed off on the $1.9 trillion relief package but there was a lot of volatility in the markets. News of the enormous spending programme, which includes $1,400 stimulus cheques, pushed the US 10-year yield above the 1.6% mark, before it subsequently pulled back.

The aggressive moves witnessed in stock markets recently have been as a result of bond yields – the upward move suggests we are in for higher growth and inflation, but it is the latter that generated selling pressure on equities. Firmer yields can be a precursor to higher interest rates, but the Federal Reserve isn't close to tightening its policy. US treasury secretary Janet Yellen announced the stimulus scheme will be enough to boost the labour market, and that at the same time she is not too concerned about inflation. 

As the 10-year yield cooled from its near 13-month high yesterday, it helped indices move higher. The Dow Jones printed a new record high but finished off the session’s peak, the S&P 500 fell 0.5%, while the NASDAQ 100 slumped 2.9%. Tech stocks have lost some of their appeal as their high valuations are being called into question, especially when travel and leisure stocks have a brighter future because economies are on track to reopen in the months ahead.    

In Europe, Germany’s DAX outperformed, surging 3.3%, as Deutsche Bank's share price gained over 4% following the news it will resume its dividend policy, as well as begin a €1 billion share buyback scheme. The FTSE 100 rallied 1.3% as recovery hopes circulated. Equity markets in Asia are mixed and European indices are on track for a quiet open.              

The dollar rallied again yesterday as dealers are banking on a robust recovery. Last week, the healthy US non-farm payrolls report acted as a nice boost to the dollar. Seeing as things are moving forward on the fiscal stimulus front, there is growing hope the largest economy in the world will bounce back reasonably well. EUR/USD suffered greatly at the hands of the dollar, while GBP/USD only lost a small bit of ground versus the greenback. The UK’s vaccination rate is north of 35%, hence why the CMC GBP index gained ground yesterday.

Gold fell to a nine-month low as the rally in the dollar took the shine off the metal. Higher bond yields were also behind the bearish move as some traders shied away from holding a non-interest-bearing asset. Silver was hit too and it appears that copper was hurt once again by profit taking. The red metal hit its highest mark since 2011 late last month but it has come off the boil since then. Optimism that the global economy will rebound underpinned the rally. Copper is used in wiring and its demand is likely to jump as electricity is on track to become more popular because greener energy supplies will detract from fossil fuels.

Brent crude oil traded above $70 per barrel yesterday – setting a 14-month high – as a Saudi Arabian oil site came under attack from the Houthi movement in Yemen. Fears about supply being curtailed sent energy prices higher, but prices retreated when it was confirmed there was no damage inflicted.

Germany trade balance at 7am (UK time) is predicted to show a surplus of €16.4 billion, up from €16.1 billion in December. Imports are predicted to fall by 0.5%, which would be a fall from the -0.1% registered in the previous update. A further decline in imports would paint a picture of weakening domestic demand, which would be worrying seeing as German is the largest economy in the eurozone. Germany’s exports are tipped to swing from 0.1% in December to -1.2% in January. The country is a large exporter so a negative reading would imply softening external demand.        

The revised readings of eurozone GDP for the fourth quarter at 10am (UK time) are anticipated to remain at -0.6% on a quarterly basis and -5% on an annual basis. The US and the UK grew by 4.1% and 1% in the last quarter of 2020. A negative reading from the euro area would cement its underperformance, as well as spark chatter about a potential recession.               

EUR/USD – while it holds below the 50-day moving average at 1.2117, 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 1.3764, 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, yesterday 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.    

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