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Equity sentiment cools post bullish week

Equity sentiment cools post bullish week

Global stock markets had a great run last week as hopes the future Biden administration would introduce extra stimulus boosted sentiment. 

In addition to that, fears surrounding the health crisis were counteracted by the news that further vaccines received approval. Moderna’s drug has been authorised for use in the UK and the EU. It was reported that AstraZeneca-Oxford University will seek EU approval for their drug this week too.

Voters in the US state of Georgia went to the polls last week to select the two senators who would represent them. Ahead of voting the Republicans had a majority in the upper house. There were concerns that if the right of centre party maintained control of the Senate, the incoming Biden administration would find it difficult to pursue its agenda. The candidates from the Democratic Party won their respective races in Georgia. When you add in Kamala Harris’ vote, the impending Vice President, the Democrats will have a marginal majority in the upper house. The party already has a majority in the lower house so it will have control of the US government.

Traders took the view that Joe Biden will go down the stimulus route, which was the main factor behind last week’s rally in worldwide stocks. The Nikkei 225 hit a 30 year high, the FTSE 100 set a 10 month high and all-time highs were seen on the DAX 30 as well as the major US indices.

The US non-farm payrolls report on Friday was mixed because on the face of it the update was poor but the finer details were largely positive. 140,000 jobs were lost last month, and that was a shock seeing as the consensus estimate was for 71,000 jobs to have been added. November’s metric was revised higher to 336,000 from 245,000. On a side note, the ADP employment report on Wednesday showed that 123,000 jobs were lost in December.

Economists were expecting the unemployment rate to edge up from 6.7% to 6.8% but it remained at 6.7%. The participation rate held steady at 61.5%. Before the pandemic it was 63.4%, while in April it fell to 60.2% but it has been reasonably stable lately. Often during economic downturns the participation rate falls as some job seekers giving up on looking for work as the environment is so bleak but the latest data suggests that sentiment is holding up.

Average earnings jumped from 4.4% to 5.1% - the highest reading in over six months. Seeing as the report only takes account of those who are in work, it seems that a relatively large number of high earners were hired last month. It is possible that retailers upped their wage offerings to entice temporary staff to work the busy Christmas period. If that is the case, then the level will probably fall back next month. Overall, the jobs report didn’t really impact market confidence. It wasn’t so bad that it sparked calls for fresh stimulus but by the same token it wasn’t so strong that it chipped away at the view that the economy doesn’t need extra assistance.

In the middle of the US session on Friday, stocks came under pressure when Joe Manchin, the Democratic senator, said he would not support Mr Biden’s plans for stimulus cheques of $2,000 to be handed out to individuals. As mentioned above, the Democrats will have a tiny majority in the Senate so every vote counts. It was later clarified that Mr Manchin is undecided on the matter, which helped US equity benchmarks set record highs on Friday night.      

The US dollar index saw a lot of volatility last week as it fell to a 33 month low on Wednesday, subsequently, it rebounded. In light of the bullish move following the disappointing ADP report and the mediocre jobs update on Friday, we might have seen the low in the greenback for now.

At the back end of last week President Trump acknowledged there will be a transition of power later this month. President-elect Joe Biden will be sworn in on 20 January. In recent days there have been calls for President Trump to be impeached in light of the riot witnessed in the Capitol building. Should impeachment calls grow we could see a pullback in the US equities and the greenback. 

Overnight, China’s CPI reading for December was 0.2%, while economists were expecting 0.1%. The November update was -0.5%. The PPI level increased from -1.5% in November to -0.4% last month, topping the consensus estimate of -0.8%. Judging by the updates, demand is rising, albeit from a low base. Equity markets in Asia are mixed and European equity benchmarks are called lower.   

Things went from bad to worse last week for gold. The recovery in the US dollar dented the yellow metal due to the inverse relationship between the assets. Traders were keen to take on more risk, hence the rally in stocks. Selling pressure on US treasuries sent the yield on the US 10 year bond to its highest mark since March. Gold fell over 4% and it dropped to its lowest level since mid-December. Silver lost over 7%, while palladium fell by 2.6%.   

On Friday, WTI and Brent crude oil rallied 2.7% and 2.96% respectively, fresh 10 month highs were notched up. Supply concerns were doing the rounds following Saudi Arabia’s announcement on Wednesday that it would cut output by 1 million barrels per day in February and March. Also playing into the mix is the view that demand for energy will rise in the months ahead as vaccines get rolled out.  

Christine Lagarde, the head of the ECB, will be moderating a panel discussion during the One Planet Discussion in Paris from 2.40pm (UK time).  The central bank is committed to tackling climate change.   

EUR/USD – Thursday’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, last week it hit a 32 month high. If the positive move continues, it could target 1.3798. A pullback might find support at the 1.3429 area. A further pullback could target 1.3344, the 50-day moving average.   

EUR/GBP – has been in a downtrend since mid-December and further losses might target 0.8864. Last 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 104.78. Should the wider bearish move continue it could target 102.00.   

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