Politics was in play last week as UK-EU trade talks and US stimulus discussions took centre stage. There were some fresh concerns on the British-European front and that weighed on sentiment a little, hence why the FTSE 100 and major indices in continental Europe lost a little ground on Friday. The absence of a Covid-19 relief package in the US caused stocks to retreat from their recent record highs.
Last night, US Senate majority leader, Mitch McConnell, said that an agreement has been reached and the package is worth around $900bn. Nancy Pelosi, of the Democrats, said the deal will take some time to finalise. US index futures initially traded higher on the news but those gains have been wiped out by concerns about the health crisis, with cases in South Korea and Germany on the rise, while Britain has become isolated due to its own health emergency.
With respect to the restrictions in the UK, things have gone from bad to worse. London and large swathes of south-east England have entered a new tier 4. The Scottish government is advising people not to enter the country, while Wales has also heightened restrictions. Rising case numbers because of a new Covid-19 strain brought about the new measures. Several European nations have banned flights from the UK – some will only last for 48 hours. France has also banned human handled freight, which will cause chaos at the ports.
Even though yesterday was originally cited as the deadline for UK-EU trade talks it's understood that differences still remain and that discussions will continue today. Given how things have gone so far, it was hardly a surprise. This comes at a time when many countries in mainland Europe are also struggling to keep a lid on their own situation – a number of countries have extended their lockdowns into mid-January. The airline sector is likely to be in focus today for all the wrong reasons. The British government admitted that tier 4 restrictions could remain in place until Easter 2021. European equity markets are expected to open lower, and sterling has tumbled.
There are increasing signs that the economic recovery in the US is running out of steam, after the initial jobless claims report rose from 862,000 to 885,000, its highest reading since mid-October. In addition to that, the Philly Fed manufacturing index dropped from 26.2 in November to 11.1 in December. Last week, the US Federal Reserve reiterated that it would continue to make monthly asset purchases of at least $120bn until there has been a significant recovery in the economy, but at the same time, there were calls for a robust fiscal stimulus package too – which we now know were answered last night.
The German IFO business climate survey for December improved to 92.1. It seems odd that sentiment ticked up seeing as the German government announced that the existing tough restrictions would be extended into mid-January. It's possible the survey was carried out before the new restrictions were announced.
Gold rallied last week thanks to the weakness in the US dollar. In recent months, there has been an inverse relationship between the two assets. Towards the back end of last week, the commodity hit its highest level since mid-November. Other metals like platinum, palladium and copper have been enjoying a positive run recently; copper reached a new seven-year high on Friday. Sticking with the commodity theme, crude oil hit a new nine-month high. Raw materials have been in high demand lately on account of hopes for a US stimulus.
At 11am (UK time), the CBI UK realised sales report for December will be posted, and the reading is expected to be 3, and that would be a big improvement from the -25 posted in November – which was the lowest reading in five months. England was locked down last month and other parts of the UK were under tough restrictions, and economists are clearly anticipating a big rebound in activity. The CBI update is heavily focused on the high street, so that area of business should be in for a lift. It's worth noting that Friday’s UK sales report for November showed a drop of 3.8%, while the consensus estimate was -4%. It was the worst reading since April. The CBI industrial orders expectation update for December was -25, its highest level since February. The reading was weak, but it points to an improving outlook.
EUR/USD – has been in an uptrend since the start of November and while it holds above the 50-day moving average at 1.1902, the positive move should continue. The 1.2300 area might act as resistance. A pullback might find support at 1.1800.
GBP/USD – has been in an uptrend since late September and if the positive move continues, it could target 1.3608. A pullback might find support at 1.3204, 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 0.8989, the positive move should continue. 0.9291 could act as resistance. A break below 0.8989 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 104.45.