European markets got the week off to a disappointing start on increasing concern about rising bond yields, and what they are telling us about the economic outlook, and the prospects for inflation.
US markets also fell back, with the biggest decline in the Nasdaq, which sank to a three-week low, over concerns that valuations in the tech sector are probably a little too high, in an environment where not only are yields on the rise, but commodity prices as well, which have seen big gains from their 2020 lows, to levels last seen back in 2013.
The move towards renewable energy is driving strong demand in precious as well as base metals, as companies move towards the adoption of battery power, and electric cars, as well as solar power, while supply cuts are putting a bid under oil prices as markets start to price in higher demand as economies reopen, in what is a perfect storm of rising prices.
Today’s European open is likely to see a little bit of a rebound after the declines from yesterday, helped by a positive Asia session, and while optimism abounds about an economic recovery, there still seems to be an abundance of caution about when to look at becoming strongly positive about the prospects for UK and European stocks.
Fresh from the optimism about an economic reopening roadmap for the UK economy, we get the latest ILO measure of unemployment for December, which is expected to show another modest uptick from the 5% level seen in November, and move up to 5.1% for the first time since March 2016, before the Brexit referendum. It is perhaps a little surprising that we haven’t seen a much bigger move higher, even accounting for furloughed workers. One reason for the still fairly low reading is that the ILO measure is very much a lagging indicator, and isn’t particularly useful, as it doesn’t include furloughed workers, and also doesn’t include the huge number of overseas workers who have left the UK to return to their home countries, where in most cases the incidences of Covid-19 cases last year were lower.
With the ever-tighter restrictions that were imposed in January a number of struggling businesses may well decide that it’s no longer worth keeping workers on furlough if they can’t reopen soon, and while yesterday’s announcement of a possible economic reopening from 12 April is welcome, more support will need to be forthcoming in order to avoid further redundancies in the coming weeks. Any additional redundancies which may have been announced in January won’t be reflected in these ILO numbers, which means the claims numbers are probably a better reflection of where the labour market is, along with the employment data itself, which has thus far seen 800,000 fewer people in employment from March last year.
Projections for unemployment are set to rise to 7.5% by the summer, especially if furlough isn’t extended beyond the current deadline of April in the budget next week. The monthly jobless claims numbers are probably a more accurate reflection of the labour market, with these at 7.4% in December, and expected to move up to 7.5% in January. The employment rate is also likely to be closely scrutinised falling to 75.2% over the three-month period in November, 1.1% lower than a year ago with the 18–24-year-old cohort, accounting for half of that drop.
The recent rise in long-term bond yields is likely to be near the top of the agenda later today when Fed chair Jerome Powell dials into US lawmakers as he testifies to the US Senate banking committee, where he is likely to be cross examined on how he, and the rest of the FOMC sees the US economy. The Fed has gone to great lengths to dial back expectations of any possible near term rate rise, giving the impression that they will ignore any short-term inflationary spikes. With US 10-year yields falling just shy of 1.4% yesterday, there is a concern that US central bankers are being a little bit too blasé about inflation risks, particularly in the face of the large-scale stimulus plan which is likely to be discussed at length on Capitol Hill later this week.
The latest US consumer confidence numbers are also likely to be closely scrutinised in light of the bumper January retail sales report from last week. Will the rebound in consumer spending be reflected in a rise in consumer confidence, or will the recent rise in bond yields give some pause for concern?
EUR/USD – still below the 50-day MA and the 1.2170 level with a break higher targeting the highs this year at 1.2350. While below here the bias remains for a move back towards the 1.2070 level. This remains a key support, with a move below 1.2060 reopening the risk of a move towards 1.1980.
GBP/USD – continues to move higher with the next target now at the 2018 peaks at 1.4380. We can’t rule out the prospect of a dip back to the 1.3820 area, and last week’s lows, but while above the bias remains for a move higher.
EUR/GBP – further declines remain possible with the 0.8600 area the next key support. A break below 0.8580 opens up the 2020 lows at 0.8280. Resistance now comes in at the 0.8770 area.
USD/JPY – looks set for a move towards the trend line from the January lows currently at the 104.60/70 area. Below that targets the 103.80 area. We currently have resistance back near the 200 day MA at 105.50.