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Bullish start tipped for Europe, silver cools

Silver was the star of the show yesterday as it experienced a major rally as the cabal of Reddit-retail traders honed in on the metal to spark a short squeeze. 

The band of retailer traders that ratcheted up the price of Gamestop shares last week poured their funds into silver. Excitement was heating up over the weekend as there was increasing chatter of #silversqueeze grew. Yesterday, the metal was boosted to its highest level since February 2013.

Regulators are understandably concerned by the activity triggered from forums on Reddit as there could be elements of price manipulation at play. It is the job of the regulator to ensure that nobody is gaming the market for the own gain.

While the regulators might have been a little nervous yesterday, the mood in stock markets was upbeat. Equity traders were fearful last week as there were brief worries that losses incurred by certain hedge funds because of Gamestop’s monster rally might cause disruption to the markets as a whole. Concerns circulated that investment firms might rush to liquidate positions as a way of freeing up cash to cover margin requirements. Even though silver was targeted by the Reddit brigade, the overall sentiment was positive. A number of hedge funds admitted they endured large losses on account of the Gamestop situation but some confidence was restored to the markets seeing as they are soldiering on. Indices in Europe and the US rallied yesterday.

Silver has handed back some of its recent gains as futures exchanges have raised margin requirements – it is a common move when volatility is high.

Yesterday the US dollar index hit its highest level in over 7 weeks as traders have more faith in the US’s economic recovery than that of the EU’s. A slow rate of vaccinations combined with harsh restrictions in several major economies has dampened the prospects of a robust economic rebound in continental Europe.

Equity markets in Asia are up thanks to the bullish move seen in the US, European indices are called higher.  

As expected the Reserve Bank of Australia (RBA) kept interest rates at 0.1%, the central bank extended its bond buying scheme by AUD$100 billion. The RBA predicts that interest rates won’t be raised until 2024 at the earliest, which put pressure on the CMC AUD Index.

According to Reuters, OPEC increased production in January to 25.75 million barrels per day, which undershot forecasts, hence the move higher in WTI and Brent crude oil yesterday. Oil hit an 11 month high in January following the news that Saudi Arabia will cut production, but lately the energy has been range bound. If we see a break above the January high, it should pave the way for further gains.  

Several manufacturing reports were posted yesterday. The Caixin survey of Chinese manufacturing for January cooed to 51.5 –its lowest reading in seven months. In the past couple of weeks the Beijing administration imposed localised lockdowns as the coronavirus has resurfaced in certain regions, so the reading could slip further from here. 

The reports from the EU were mixed. The Spanish manufacturing sector posted a surprise contraction. Activity in France and Italy ticked up, while the German reading showed a small dip in the expansion rate. The UK manufacturing PMI reading was 54.1, beating estimates, but down from 57.5 in December.

The US ISM manufacturing report cooled from 60.5 in December – the fastest rate of expansion in over two years – to 58.7 in January. On the face of it, the headline figure suggests there is no need to get too worried but the new orders component dropped from 67.9 to 61.1. Prices paid jumped from 77.6 to 82.1, which could be an early indication that we are on track for higher inflation. Fewer orders and higher costs is not a good combination as it is the worst of both worlds.

At 7am (UK time) the Nationwide HPI report for January will be posted. The consensus estimate is 0.3%, which would be a drop from 0.8% in December.

The French CPI reading is expected to rise from 0.0% in December to 0.4% in January. It will give us an indication of demand in France and it will be posted at 7.45am (UK time).

Italy’s fourth quarter GDP reading will be announced at 9am (UK time). Economists are anticipating -2.2% on a quarterly basis. In the previous quarter, the economy grew by 15.9%. Last week, the other major economies of the currency bloc revealed their growth reports. In the final three months of 2020, the French, Spanish and German economies grew by -1.3%, 0.4% and 0.1% respectively. The flash reading of eurozone GDP for the fourth quarter is predicted to be -1%, which would be a big swing from the 12.5% registered in the third quarter. It will be announced at 10am (UK time).            

EUR/USD – has been trading around 1.2135, the 50-day moving average, recently. While it holds below that level, the outlook is likely to remain bearish. A break below 1.2058 should see it target 1.2000 or 1.1923. If the broader uptrend continues it could retest 1.2349.

GBP/USD – since late September it has been in an uptrend, last week it hit a 33 month high. If the positive move continues, it could target 1.4000. A pullback might find support at 1.3521, the 50-day moving average.   

EUR/GBP – has been in a downtrend since mid-December and further losses might target 0.8800 or 0.8670. A rally from here could see it hit 0.8994, the 200-day moving average.   

USD/JPY – since early January it has been moving higher and it recently hit an 11 week high. While it holds above the 50-day moving average at 103.88, the bullish trend should continue and it might bring 106.00 into play. A move back through 103.88, could see it target 102.59.