Equity markets in Europe and the US enjoyed rallies yesterday as traders bought stocks on the back of the view that the future Biden administration will be keen to use stimulus packages to support the economy.
In late December, lawmakers signed off on a $900 billion relief package but in October, Nancy Pelosi, of the Democrats, was pushing for a programme worth in the region of $2 trillion. In the end compromises were made in order to get some sort of a package agreed. There is a feeling that President-elect Joe Biden will push for more financial support when he takes over the top job later this month. The S&P 500 and Russell 2000 racked up new record highs, so it was a broad-based rally.
Market volatility is likely to be low for much of the day, ahead of the US non-farm payrolls report at 1.30pm (UK time). Economists are expecting the headline reading for December to be 71,000, which would be a huge fall from the 245,000 registered in the previous report. In November, the unemployment rate fell to 6.7% – the lowest reading since March – but the consensus estimate for December is 6.8%. Average earnings are tipped to hold steady at 4.4%. Given the upheaval in the labour market, the participation rate has been given extra attention. The metric fell from 61.7% in October to 61.5% in November and that could be seen as a sign that there is falling confidence in the jobs market. During economic downturns, some people who are out of work stop searching, and that contributes to a falling participation rate.
During the week, the US ADP employment report for December showed that 123,000 jobs were lost. It was the first negative reading in six months. It wasn’t all bad news as yesterday’s initial jobless claims reading was 787,000 – the joint lowest level in five weeks. This week's job components of the ISM manufacturing and non-manufacturing reports were mixed. Lately there have been growing concerns that the rebound in the US economy is starting to fade, so the jobs update will be closely watched. Dealers might adopt the attitude of bad news for the economy is good news for the stock market – stimulus chatter could rise.
President Trump has finally conceded that the new administration will take over on 20 January. The outgoing president confirmed that he wants a smooth transition of power and that should ease traders’ fears about the possibility of further violence.
Equity markets in Asia and Australia are largely showing strong gains thanks to the bullish moves in the US. The Nikkei 225 hit its highest level since August 1990. European stock markets are called higher; in fact the DAX 30 is set for a record open.
The US dollar enjoyed a decent rally yesterday and that followed the robust rebound witnessed on Wednesday, where it fell to its lowest level in over two-and-a half-years and then it finished higher on the session. In the past few months the dollar has seen a few sizeable rebounds but it then ended up rolling over on itself again, so the jobs report today could be very influential.
Gold declined for a second day as the firmer dollar impacted the commodity. Also playing a role in gold’s decline was the bullish run in equities – traders turned their backs on the yellow metal as they wanted to take on more risk. Copper rallied again as hopes for Biden’s infrastructure spending plans spurred buying. Brent crude oil and WTI pushed higher to reach a new 11-month highs, as supply worries continue to prop up the energy market.
German trade data will be posted at 7am (UK time) and exports for November are expected to remain on at 0.8%, while the imports metric is anticipated to be 0.4%, which would be an increase from the 0.3% posted in October. Germany is the largest economy in the eurozone and the imports metric will give us an indication of internal demand. The country is also a manufacturing powerhouse so the exports reading paints a picture of external demand. Several European countries had lockdowns in November but nonetheless, German manufacturing orders increased by 2.3% during the month, while economists predicted a 1.2% fall, so the trade numbers could also be a pleasant surprise.
The Halifax house price index report (at 8.30am) consensus estimate is 0.5% on a monthly basis, and that would be a dip from the 1.2% posted in November. The eurozone unemployment rate for November (10am UK time) is expected to be 8.5%, up from 8.4% from in October. The lockdowns in place across the currency bloc might play into the data.
Canada’s jobs report will be announced at the same as the US update. The unemployment rate is expected to be 8.6%, up from the 8.5% posted in December – which was an eight-month low. The employment change reading is tipped to be -27,500, versus the previous update showing that 62,100 jobs were added.
EUR/USD – yesterday’s candle has the potential to be a bearish reversal and if it moves lower from here, it might target 1.2129. A move through that metric could see it hit 1.2000. If the broader uptrend continues, resistance might be encountered at 1.2480.
GBP/USD – since late September it has been in an uptrend and on Monday it hit a 32 month high. If the positive move continues, it could target 1.3798. A pullback might find support in the 1.3429 area. A further pullback could target 1.3332, the 50-day moving average.
EUR/GBP – has been in a downtrend since mid-December and further losses might target 0.8864. Monday’s candle was bullish and if it holds above 0.9000, it could put the 0.9100 area on the radar.
USD/JPY – if you blend Wednesday’s and Thursday’s candle, the combined candle has the potential to be a bullish reversal and if it moves higher from here it could encounter resistance at the 100-day moving average at 104.80. Should the wider bearish move continue it could target 102.00.