After the early week exuberance of the first week of 2021, investor appetite for risk has taken a little bit of a knock in the last week or so, largely down to concerns that the recovery story being priced in may well be a little premature.
It probably hasn’t helped that expectations of a shock and awe Democrat fiscal plan, are also starting to get pared back a touch as well, as details of the new $1.9trn fiscal aid plan start to come into clearer focus. US and European markets finished last week very much on a downbeat note, almost wiping out most of the gains seen in the first week of the year.
The delayed recovery concerns were given added credence on weaker than expected US retail sales data, as well as European governments variously announcing tighter lockdown restrictions, in the face of rising coronavirus infection and death rates. Over the weekend reports out of Germany suggested the prospect of a night time curfew was being considered, after France imposed its own lockdown curfew from 6pm in the evening last week. The UK government also tightened its own lockdown rules, closing all travel corridors into the country starting at 4am this morning, and imposing strict testing and quarantine restrictions on anyone entering the country.
Concern over the levels of US vaccine reserves, along with reports on Friday that vaccine deliveries in Europe were being pared back due to short-term supply constraints also didn’t help, putting downward pressure on US treasury yields, and helping to push the US dollar index to its highest levels since 21 December.
For several months now China has been able to avoid a second wave of coronavirus infections, with last week’s December trade data pointing to an economy that appears to have recovered all of its lockdown losses of last year. This morning’s economic numbers showed that the Chinese economy expanded by 6.5% in Q4, with the last three months suggesting that economic activity had more or less returned to normal. While the headline GDP number looks impressive, it is still clear from consumer spending numbers that the Chinese consumer is still exhibiting some level of caution,with retail sales growth still below the levels last seen at the end of 2019, when spending was trending at levels close to 8%.
This morning’s December numbers showed that retail sales rose for the fourth month in succession, rising 4.6%, a slight decline from November’s 5% rise, and below expectations. The apparent lack of a second wave appears to be prompting Chinese consumers to slowly reopen their purse strings, however we still remain well below the levels seen at the end of 2019, suggesting that Chinese consumers remain cautious when it comes to reopening the purse strings. Year on year retail sales declined 3.9%, while the economy grew a very modest 2.3%.
The slowdown in retail spending is a little worrying which suggests that, for all of this trend of economic improvement, there is some worry given reports of isolated coronavirus outbreaks within China, which are prompting localised lockdowns on a rolling scale. These clusters of cases have prompted Chinese authorities to build a new 1,500 hospital in the space of five days to cope with a sharp rise in cases, in and around Beijing.
These concerns over a delay to the global recovery have also translated into a mixed start for Asia markets this morning, with the Nikkei 225 lower, with markets here in Europe also look set to open on the back foot.
In the absence of US markets for Martin Luther King Day volumes are likely to be on the low side with trading activity likely to diminish as the day progresses.
EUR/USD – has come under increasing pressure over the last week or so with the 1.2070 area and 50-day MA the next key support area. A break below her opens up a potential move towards the 1.1980 area, and possibly lower towards the 1.1800 area. Resistance comes in at the 1.2230 area.
GBP/USD – last week’s failure at the 1.3710 area runs the risk of a move lower, with support at the 1.3420 area. A break here sees the potential for a move towards 1.3200. A break above 1.3720 opens up a move towards the 1.4000 area.
EUR/GBP – bias remains for a move lower towards 0.8780, through the hugely significant support at the 0.8860 area, while below the 0.8980 area. A move through 0.9000 open up the 0.9100 area.
USD/JPY – the failure at 104.40 cloud resistance last week has seen the US dollar slip back. This area is a key barrier to further gains towards 105.20. While below 104.40 the bias remains for a move back towards the January lows at 102.60.