European markets got off to a disappointing start to the week on a combination of concerns about another lockdown in France, the threat of tighter restrictions for longer across Europe, a slower vaccine rollout, and disruption to vaccine supply.
US markets, on the other hand, have continued to defy gravity after another choppy session, with the Nasdaq once again helping to underpin sentiment with another record close, helped by optimism over the start of earnings season for big tech, starting today with Microsoft, followed up tomorrow with Apple.
The resilience of US markets appears to be being driven by the exuberance of retail investors, or Robinhood traders, who appear to be operating in a swarm-like manner, helping to drive significant amounts of volatility in a range of US stocks.
The main focus this week is still on the conclusion of this week's Federal Reserve meeting, against a backdrop of renewed partisan bickering over the size of the next stimulus bill, which may well come in below the initial $1.9trn headline numbers of a couple of weeks ago. This uncertainty around the timing, as well as the amount of a new package appears to be driving an element of uncertainty among investors, with Asian markets slipping back, while European stocks look set for a mixed open, following yesterday’s negative session, as partisan bickering once again returns to the fore.
On the data front we have the latest unemployment numbers from the UK for the three months to November, coming up shortly. In his spending review announced in November, chancellor Rishi Sunak forecast that UK unemployment could peak in the second quarter of 2021 at 7.5%, and to that end he said that he would put aside £3bn to deliver a new three-year restart programme for those longer-term unemployed, to try and get them back into work or training. While this was well received at the time, along with the furlough scheme which was extended into April, it is likely to have come too late for a lot of people in vulnerable jobs, given that a lot of employers decided to make a start on reducing headcount before the new tighter lockdown measures were announced in November, December, and at the beginning of this month. With an economic reopening now put back even further, probably into Q2 of this year at the earliest, it is quite likely that further job losses will come in the weeks and months ahead, even if the government does come up with some extra help in any March budget.
The Chancellor is already under pressure to bring forward any measures from the March budget in order to give businesses a little bit more longer-term certainty around their spending decisions over the next six months, at a time when a good number of them are already close to collapse. All of the talk of possible tax rises in the March budget is unlikely to help employer sentiment either, and is something that Rishi Sunak needs to put a stop to. There will be plenty of time to think about how to pay for all of this extra borrowing, however now is not it. Business needs confidence to keep its furloughed staff on the payroll a little bit longer. If they think their costs will go up, they either won’t bother, or could even struggle to survive into the summer.
If the chancellor doesn’t want unemployment to surge over the summer, he will do well to support struggling businesses a little bit longer. In the long run it could pay off. The ILO measure of unemployment for November is expected to show an increase from the 4.9% level seen in October and move above 5% for the first time since April 2016, before the Brexit referendum, with some expressing surprise it hasn’t actually come in higher sooner, 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 a particular useful indicator, not only because it doesn’t include furloughed workers, but it also doesn’t include overseas workers who may have left the UK to return to their home countries, where in most cases the incidences of Covid-19 cases are lower. The monthly jobless claims numbers are probably a more accurate reflection of the labour market, with these at 7.4% in November, and expected to move up to 7.5% in December. CBI retail sales for January are also expected to decline sharply, to a seven-month low of -33, with most non-essential retail shops closed.
In the US, the economic situation is looking slightly better, however as in the UK, consumption spending makes up a good 70% of the US economy. This has shown signs of stalling in recent months, with the strong rebound in retail sales since the US came out of lockdown running out of steam at the end of last year, after we saw sharp declines in US consumer spending in November and December. With virus cases rising, along with rising political uncertainty as President Trump did the equivalent of throwing his toys out of his pram at the election result, US retail spending has slowed sharply.
This slowdown has also been showcased in slumping consumer confidence, which fell back to 88.6 in December, as consumers weighed up the loss of the $600 a week Cares Act payment that went to US households after coming into effect at the end of July, before US lawmakers failed to agree on a replacement. While US lawmakers were able to eventually agree on a replacement to this payment, the ensuing uncertainty is still likely to act as a brake during January, especially given that virus cases and hospitalisations continue to rise, which means we there could be further weakness in this afternoon’s numbers.
EUR/USD – the recent rebound in the euro ran out of puff a bit yesterday. But it is still holding above the 50-day MA now at 1 2100 for now. While above here the euro needs to overcome the 1.2230 area to kick back towards the highs this month at 1.2350. A move below 1.2040 could well signal further losses towards the 1.1980 area, and possibly lower towards 1.1800.
GBP/USD – ran out of steam at 1.3725 yesterday falling short of last week’s high at 1.3745. The case for a move towards 1.4000 remains intact while above 1.3450 and the lows from two weeks ago.
EUR/GBP – while below last week’s peak at 0.8920 the risk remains for a lower currency, back towards 0.8830 and the lows last week. Below 0.8830 targets a move back to 0.8780.
USD/JPY – downside risk towards 102.60 remains intact while below downtrend resistance now at 104.30, as well as cloud resistance at 104.70 This area is a key barrier to further gains towards 105.20.