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Equity sentiment steady, US ADP and Georgia Senate race in focus

Equity sentiment steady, US ADP and Georgia Senate race in focus

European equity markets were mixed yesterday as eurozone indices finished lower as concerns about lockdowns put pressure on stocks. 

Meanwhile on this side of the English Channel, the FTSE 100 finished higher, but that had a lot to do with the strong gains posted by Royal Dutch Shell and BP as they have relatively large weightings in the index.

The health crisis remains at the forefront of traders’ minds especially in light of the tougher restrictions being introduced in countries like Germany, the UK and Denmark. The number of new Covid-19 cases in a day in the UK topped 60,000 for the first time and there is a growing feeling that things will get worse before they will get better. On the other side of the coin, dealers are mindful that vaccinations are being rolled out but the process is likely to be slow, so governments are unlikely to rolling back on restrictions anytime soon.

US markets pulled back some of the losses they incurred on Monday. Yesterday, voters in the state of Georgia went to the polls for the dual Senate race. The outcome will be closely watched as it will determine whether the Democrats take control of the upper house – they already control the lower house – or whether the Republicans will maintain control of the Senate. The Democrats need to win both seats to take control of the upper house. According to reports, the races are neck and neck. An election official in Georgia said the final results might be known at lunchtime – local time – so we could have clarification around 6pm (UK time).                     

The oil market saw a lot of volatility yesterday. Monday’s OPEC+ meeting didn’t end in an agreement and it spilled over to yesterday. In typical OPEC+ fashion there were disagreements in relation to the output levels. Going into the meeting, it was possible that group output would be lifted by 500,000 barrels per day (bpd) in February but there was a lot of push back on that. There was also talk of a 500,000 bpd cut in output. 

In the end, it was announced that Saudi Arabia, Russia and Kazakhstan will alter their output for February and March while other members of the group would maintain their production. It was reported that Russia and Kazakhstan will lift production by 65,000 bpd and 10,000 bpd respectively in February and March, while Saudi Arabia would cut production as a way of balancing out the increases in output. There was talk that the Saudi’s would cut production by 400,000 bpd in February and March and a while later it was confirmed they would slash output by 1 million bpd in February and March. WTI and Brent crude oil gained over 4.5% yesterday but they settled down overnight. 

Oil wasn’t the only commodity to push higher yesterday. The slide in the US dollar pushed gold to an eight week high and silver set a four month high. Copper is typically seen as a good barometer for the perceptions of the global economy, and the red metal hit a level last seen in February 2013. So it seems that traders are optimistic the world economy will continue to recover from the pandemic.

Overnight the Caixin survey of Chinese services for December was 56.3 and economists were expecting 58.1. The previous reading was 57.8. Equity markets in China, Hong Kong and Japan are broadly flat, and European indices are being called a little higher.

Bitcoin’s positive run continues as it set a new record high by trading above $35,000.             

French CPI will be posted at 7.45am (UK time) and the consensus estimate is that the reading will be unchanged from the November level of 0.2%.

Between 8.15am (UK time) and 9.30am (UK time) the major economies of Europe will post their services PMI reports for December. Spain, Italy, France, Germany and the UK will announce their updates and the consensus estimate is 45, 45.3, 49.2, 47.5 and 49.9 respectively. Earlier in the week, all the countries posted their manufacturing readings, and they showed improvements on their November readings, but only the British reading exceeded analysts’ forecasts. 

The German CPI rate for December is tipped to be -0.6%, up from -0.7% in November. The update will be posted at 1pm (UK time). Like with the French inflation update earlier in the day, traders will be interested to see if demand is rising. 

The US ADP employment report is likely to be the most important announcement of the day. The reading is expected to show that 88,000 jobs were added last month, and that would be a huge fall from the 307,000 created in the last report. Lately, there have been some concerns that the economic recovery in the US is running out of steam and a weak reading would probably compound those fears. After many months of negotiations, US lawmakers agreed upon a $900 billion stimulus package late last month so it is possible that it will take time to trickle down to the economy, and in turn the labour market. Even if today’s reading is disappointing, that’s not to say that things won’t improve in the months ahead.

Andrew Bailey, the head of the Bank of England, will be speaking before the Treasury Select Committee at 2pm (UK time). The central banker is likely to point out that UK banks are well capitalised but now that the UK has left the transition period with the EU, there are some uncertainties on the horizon such as clearing services for euro denominated derivatives. The European Markets and Securities Authority has agreed to maintain the current clearing arrangements until June so new terms will need to be negotiated.

The final reading of the US services PMI report for December will be announced at 2.45pm. The consensus estimate is 55.2 which would be a dip from the 55.3 posted in the flash report, and the November report was 58.4 – which was the fastest rate of expansion in over five years.

At 3.30pm (UK time) the Energy Information Administration will be post its energy stockpiles update and oil and gasoline inventories are expected to fall by 1.5 million barrels and 1.55 million barrels respectively.   

EUR/USD – has been in an uptrend since the start of November and while it holds above the 50-day moving average at 1.1991, the positive move should continue. Resistance might be encountered at 1.2480. A move lower could see it target 1.2129.     

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 1.3500 area. A further pullback could target 1.3310, 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 – is still in its wider downtrend and if the bearish move continues it could find support at 102.00. A rebound could encounter resistance at the 50-day moving average at 104.13.