Stocks markets in Europe and the US broadly had a downbeat session on Friday.
The coronavirus was at the forefront of traders’ minds. At the back end of last week, the Chinese authorities changed the methodology in the way they determine new infections, which made it clear the situation was far worse than initially thought. Even though some equity markets lost ground on Friday, the falls weren’t that big considering the severity of the health situation.
Traders are mindful of the fact the Chinese authorities intervened in the financial markets at the beginning of the month when the domestic stock markets reopened after the Lunar New Year celebrations. Some dealers hold the view that Beijing will intervene in the markets again should the situation get much worse, which could explain the resilience of equity markets.
Overnight Chinese stocks performed well on the hopes the Chinese government is planning on introducing tax cuts to help cushion the blow of the health emergency. There was also speculation the Peoples Bank of China would reveal a liquidity injection worth 4 billion yuan.
The Nikkei 225 is in the red on the back of the dreadful GDP figures. On a quarterly basis, the economy contracted by 6.3% in the final three months of the 2019 – undershooting the -3.7% forecast.
The trading session in Europe is likely to experience low volatility today seeing as the US stock market will remained closed today as it is the President’s Day holiday. Whenever our US counterparts are on holiday, trading in this part of the world tends to be quiet.
Sterling saw a jump in volatility last week when it was announced the relatively unknown Rishi Sunak, will replace Sajid Javid as Chancellor of the Exchequer. The pound made gains on the back of the news as dealers took the view that Mr Sunak is more likely to go along with Prime Minister Johnson’s pro-stimulus mind-set. There has been chatter that Mr Johnson is keen to go on a Trump-esque spending spree in a bid to shrug off-off the economic cooling of the UK. The lack of clarity in relation to the UK’s post-transition period relationship with EU has damped consumer spending as well as held back investment. The Budget will be announced next month and there is speculation that government spending plans will be revealed, so sterling is likely to remain in demand while that chatter circulates.
This week the UK will reveal several important economic indicators. The unemployment rate is tipped to remain low at 3.8%. Average earnings excluding bonuses are expected to cool to 3.3% from 3.4%, while the CPI rate is tipped to jump from 1.3% to 1.6%. Even though the cost of living is predicted to spike, it is should remain well below the rate at which wages are increasing – where workers are getting a decent increase in real wages. The retail sales report was dreadful for December as it showed a 0.6% fall, but it is expected to rebound to 0.5% for January.
China is major importer of commodities but even though the health crisis deepened last week, oil plus copper rallied, - which could be a sign that maybe we are over the worst of the fear surrounding the coronavirus. Last week Brent crude and WTI posted gains of 4.4% and 3.3% respectively – they managed to snap their losing streak. Copper rallied for a second week in a row, but the price is still nowhere near the level it was at in advance of the health crisis.
The euro had a rough ride last week as came under pressure but there wasn’t a particular catalyst. On Friday it was confirmed the Germany economy grew by 0.0% in the final quarter of 2019, but the single currency had already fallen to a 33-month low versus the US dollar before the news. The chatter about Germany edging towards a recession is likely to remain in the news, which should keep pressure on the euro.
EUR/USD – has been pushing lower since late December and while it holds below 1.1000, the bearish move should continue. Support might be found at the 1.0800 area. A rebound might run into resistance at 1.1000.
GBP/USD – while it holds above the 1.2900 area the wider positive move should continue. A break above 1.3284 should pave the way for the 1.3500 area to be retested. A break below 1.2900 might pave the way for 1.2768 to be tested.
EUR/GBP – surged earlier last week but while it holds below the 0.8538 mark, the broader bearish trend is likely to continue. A drop below 0.8387 might bring 0.8276 into play. Resistance might be found at 0.8600.
USD/JPY – has pushed higher and while it holds above the 50-day moving average at 109.35 the wider bullish trend should continue, and it might retest the 110.67 area. A move below 108.30 might put 107.65 on the radar.
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