Stock markets in Europe yesterday rebounded from the major declines witnessed on Monday, when sentiment was very bearish over fears the UK would be isolated.
At the weekend, the British government announced that London and areas in southern England will endure stricter restrictions because of the new strain of Covid-19 in circulation. Some governments reacted by banning flights from the UK, while the French imposed a 48-hour freight ban. The mood on Monday was downbeat due to concerns that the UK could be isolated, plus uncertainty in relation to the UK-EU trade deal.
However, sentiment improved yesterday, even though the new variant of coronavirus is still a major issue. The French government started to soften its stance with respect to the two-day passenger and goods ban and that set the tone in European markets yesterday. Fears of the UK being cut off from the rest of Europe faded, and traders bought back into equity markets as they took the view that goods would be freely moving across the Channel again.
US equity markets finished slightly lower. After much back and forth, the House of Representatives and the Senate backed a $900bn coronavirus stimulus package. The move should help the US continue with its economic rebound, but the announcement had a muted reaction, probably because the deal was considered to be a foregone conclusion. At the back end of last week, the S&P 500 and the NASDAQ 100 hit new intraday record highs – so the scheme was probably factored into the markets.
Overnight, President Trump expressed his dissatisfaction with the $900bn package and there are concerns he will not sign it off. US index futures came under pressure on the back of the news but they have since recovered. Equity markets in Asia are higher, but European indices are tipped to open in the red.
After the close of trading in Europe it was announced that the French government informed EU envoys that travel links to the UK would reopen in a few hours. Passenger and freight links between the two countries are operational again. Truck drivers can pass between the two countries provided they show a negative test result for Covid-19. Let’s not lose sight of the fact that the new strain of Covid-19 has been detected in other countries and that poses a potential health flare-up at some point in the next few weeks or months.
The UK-EU trade talks are still ongoing and the pressure was seen on the pound yesterday. Fishing continues to be a stumbling block and the clock is ticking as the transition period ends in just over a week. Yesterday afternoon there was talk of a "final push" being attempted, the sort of rhetoric that we have heard before. The EU’s chief negotiator, Michel Barnier, was reported to have said that negotiations could carry on beyond 1 January. That could be a way of laying the foundations for talks to spill into the new year, which would add to the uncertainty of the situation.
The US dollar rallied yesterday as the slightly subdued mood in US equities prompted dealers to snap up the relatively cheap greenback – it fell to a fresh two-year low last week. Commodities had a tough time yesterday as copper, oil, platinum and palladium suffered as concerns that demand would be impacted by the health emergency still did the rounds. The firmer dollar didn’t help either.
At 8am (UK time), Spanish GDP will be posted and economists are expecting the final reading for the third quarter to be unchanged from the flash reading of 16.7%. The economy contracted by 17.8% in the second quarter.
The US releases several important economic reports at 1.30pm (UK time). Personal income and personal spending for November are expected to be -0.3% and -0.2% respectively, versus October's personal income reading at -0.7% and spending at 0.5%. A sharp fall in spending would be a sign that the US economic recovery is waning. The core PCE metric for November is tipped to be 1.5%, a small increase from 1.4% in October. The durable goods report for November is expected to be 0.6%, which would be a big drop off from the 1.3% posted in the previous month.
The US initial jobless claims report is expected to hold steady at 885,000 – its highest level in nine weeks. The continuing claims report is tipped to tick up from 5.5m to 5.55m. As mentioned above, dealers will be looking for signs that the recovery in the economy is running out of steam. The final reading of the University of Michigan consumer sentiment report (3pm) is anticipated to be 81.3, a touch off the preliminary level of 81.4. At 3.30pm, the energy information administration is expected to show oil and gasoline inventories of -3.25m barrels and 1.17m barrels respectively.
EUR/USD – has been in an uptrend since the start of November and while it holds above the 50-day moving average at 1.1919, the positive move should continue. The 1.2300 area might act as resistance. A pullback might find support at 1.1800.
GBP/USD – since late September it has been in an uptrend and if the positive move continues, it could target 1.3608. A pullback might find support at 1.3221, the-50-day moving average, and a break through that metric should put 1.3000 on the radar.
EUR/GBP – has been in an uptrend since up late November and while it holds above the 200-day moving average at 0.8988, the positive move should continue. 0.9291 could act as resistance. A break below 0.8988 could put 0.8864 on the radar.
USD/JPY – is still in its wider downtrend and if the bearish move continues it could find support at 102.00. A rebound could encounter support at the 50-day moving average at 104.37.