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Sentiment cools post Biden’s $1.9 trillion stimulus, UK GDP in focus

European equity markets posted moderate gains yesterday as the mood was lifted by the expectations that President-elect Joe Biden would announce details of a new stimulus package. 

US indices were in positive territory for much of the session but finished slightly lower. Volatility in stocks was low throughout the week as the Biden update was on traders’ minds. Optimism was doing the rounds but at the same time, the mood was muted as taking a very aggressive long position ahead of the announcement was considered a high risk strategy by some dealers.

Overnight, Mr Biden revealed a stimulus package of $1.9 trillion. Ahead of the announcement there was speculation the package would be in the region of $1.3-$2 trillion, so it was at the upper end of estimates. The programme includes direct payments of $1,400 to most Americans, it is worth noting that last month’s $900 billion relief package includes $600 payments. Also revealed last night was, $350 billion in state and local aid, $170 billion for education, Federal unemployment benefit will upped to $400 per week until September, and $50 billion has been allocated for Covid-19 testing. Last night’s update is aimed at providing support to the coronavirus-ravaged economy. Mr Biden is expected to announce another massive spending plan in the first few weeks of his presidency. The second scheme will be focused on boosting infrastructure as well as tackling climate change.

US index futures have drifted lower since the announcement of the $1.9 trillion spending plan, it has been a case of buy the rumour and sell the fact. The major indices in the Far East are showing modest losses. European indices are on track to open lower.

The US-China relationship has come under a little more strain as President Trump has placed Xiaomi– a smartphone maker – on a blacklist due to concerns it is connected to the Chinese military.              

Currencies had a more exciting session than stocks yesterday. The euro fell to a seven week low versus the pound, and it dropped to a one month low against the US dollar. Jerome Powell, the Fed chair, issued an update which put caused the greenback to fall into the red. The central banker is focused on getting back to a strong labour market. Striking a relatively optimistic note, he said the labour market should recover sooner than expected. Mr Powell was very clear that interest rates will not be hiked anytime soon and that it is not the time to talk about trimming the monthly $120 billion bond buying scheme. This put pressure on the dollar, while providing a lift to stocks, oil as well as gold – not all of the gains lasted tough.  

Yesterday’s initial jobless claims report was disappointing as the reading jumped from 784,000 to 965,000 – the highest level since August. The consensus estimate was 795,000, so the reading came as a shock The continuing claims report is one week behind the jobless claims, and the metric rose from 5.07 million to 5.27 million. Wednesday’s Beige Book report showed that several districts saw a rise up in unemployment. When you factor in the -140,000 US non-farm payrolls reading as well as the -123,000 ADP update, it is clear the US labour market is going through a soft patch. If anything, the jobs data justifies the stimulus package from Mr Biden.

Oil swung between positive and negative territory yesterday. China played a big role in oil’s move as it was reported the nation’s oil imports increased by 7% in 2020. That was counteracted by the announcement that China experienced its highest number of new Covid-19 cases in 10 months. Concerns about future demand pushed the energy into the red. Oil managed to close higher on the day as the comments from Jerome Powell helped the commodity.         

At 7am (UK time), the UK will release a number of economic reports. The GDP reading for November is expected to be -5.7% on a monthly basis, which would be a sharp fall from the 0.4% growth that was registered in October. The services reading for November is anticipated to be -6.7%, while the previous update showed 0.2% growth. England was on lockdown in November and other parts of the UK has strict restrictions too so that’s why economists have such low expectations.

Approximately 75-80% of British economic output comes from the services sector, so traders will be paying close attention to the report. The services PMI reading for the UK in November was 41.7 – the sharpest contraction in six months.    

UK industrial output, manufacturing output and construction output readings are expected to be 0.5%, 0.9% and 0.5% respectively. The consensus estimate for the trade balance is -£10.75 billion. 

US retail sales will be in focus as traders will be keen to see how what consumers’ appetite was in December, which is a crucial month for retailers. Economists are expecting 0.0%, up from -1.1% in November. The update that excludes auto sales is tipped to be -0.1%, while the last update was -0.9%. The New York manufacturing index for January is expected to be 6. It is worth noting the December metric was 4.9 – a four month low. Lately there have been worries the US economic rebound is fading, so the reports will give us more of an insight into internal demand. The readings will be posted at 1.30pm (UK time).

The preliminary reading of the University of Michigan consumer sentiment for January is predicted to be 80.0, down from 80.7. It will be released at 3pm (UK time).  

EUR/USD – yesterday it fell to a one month low and if the recent bearish move continues it could target 1.2000 Yesterday’s candle has a relatively long wick, which suggests indecision. If it holds above 1.2110, it might re-test 1.2349.  

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 1.3792. A pullback might find support at the 1.3429 area. A further pullback could target 1.3411, the 50-day moving average.   

EUR/GBP – has been in a downtrend since mid-December and further losses might target 0.8864 or 0.8800. A rally from here could see it target the 0.9000 mark.   

USD/JPY – hit a one month high on Monday but Tuesday’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 104.67.

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