Volatility in the markets was low across the board yesterday, there was no change to the macroeconomic outlook, hence why trading ranges were relatively small.
The health crisis is still bubbling away in the background, which means that governments are expected to maintain their current lockdowns. To an extent, that is being counteracted by the distribution of vaccines but realistically speaking that process will be drawn out.
After the close of the European markets, Italy was plunged into a political crisis as the Viva party withdrew its support for the ruling coalition. The move could trigger a new general election. In light of the Covid-19 crisis, this is the last thing the indebted country needs.
Stock markets saw strong gains last week, whereby the FTSE 100 notched up a 10 month high. In addition to that, the DAX and the US indices registered record highs. The bullish sentiment was largely fuelled by the view the US President-elect, Joe Biden, would announce stimulus spending this week. The chatter is the spending programme will be $2 trillion. We should hear from Mr Biden today. Essentially, the markets have been in a holding pattern for the past three days as dealers have been waiting to hear from Mr Biden. To an extent, a large amount of positive news has been factored into stocks and commodities.
At the end of last month, US lawmakers approved a $900 billion coronavirus relief package. Compromises had to be made across the political divide. In a few weeks, the Democrats will have full control of the US government so it will be in a position to enact change easily. Their majority in the Senate will be tiny but they will control the upper house nonetheless.
Donald Trump became the first US President to be impeached twice. The House of Representatives voted to impeach him for inciting the riot in the Capitol Building. The next step in the process is a Senate trial but that will be held after Mr Biden has been inaugurated.
Overnight, China posted its trade data for December. Imports came in at 6.5%, while the consensus estimate was 5%. The November reading was 4.5%. Economists were expecting exports to be 15%, but it was 18.1%, which showed a cooling from the previous reading of 21.2%. The robust imports metric speaks to rising internal demand. China is a major producer of personal protective equipment so the shipments are likely to be a high percentage of exports. Despite the solid import figures, stocks in mainland China are in the red, by contrast, equities in Hong Kong and Japan have gained ground. European markets are on track for a positive start.
Sterling has been moving higher since mid-September. Confirmation on Christmas Eve that the UK-EU trade deal was struck helped, the subsequent approval of the agreement by both sides added to the bullish move. On Tuesday, the pound was given a lift after the Bank of England chief, Andrew Bailey, said that negative interest rates are a controversial policy. The central banker also said that it was too soon to unleash addition stimulus. The comments helped the CMC GBP Index hit its highest mark since early September yesterday.
WTI and Brent crude oil finished in the red last night. The energy market was lifted following the release of the Energy Information Administration report as it showed that US oil inventories fell by 3.24 million barrels, while the consensus estimate was for a decline of 2.55 million barrels. Gasoline stockpiles rose by 4.39 million barrels – a bigger build than expected. Oil slipped back from its recent 11 month highs.
The Beige book update last night showed that most districts saw employment increase but a growing number of regions saw the jobless rate tick up. Wages saw modest gains but overall they are weak. Prices rose in nearly all districts, and a number of regions said there has been improved ability to raise prices, which speaks to improving demand.
Lael Brainard of the Federal Reserve said the near-term outlook is challenging and the economy is far from achieving its goals. Jerome Powell, the Fed chair, will be speaking today at 5.30pm (UK time). Mr Powell’s update will be closely watched in light of the mixed US non-farm payrolls report last week.
The preliminary reading of German GDP for 2020 will be posted at 9am (UK time) The forecast is -5.1%, which would be a sharp decline from the 0.6% growth registered in 2019.
US jobless claims are expected to drop to 780,000 from 800,000. The US labour market has been in focus for the wrong reasons lately, because the latest ADP report was poor, while non-farm payrolls update was mediocre.
EUR/USD – on Tuesday it bounced back from the three week low that was set on Monday. If it holds above 1.2129, the broader uptrend should continue and it might encounter resistance at 1.2480. A break below 1.2129 could see it hit 1.2000.
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 1.3396, the 50-day moving average.
EUR/GBP – has been in a downtrend since mid-December and further losses might target 0.8864 or 0.8800. Last Monday’s candle was bullish. A retaking of 0.9000 could put the 0.9100 area on the radar.
USD/JPY – hit a one month high on Monday but Tuesday’s candle has the potential to be a bearish daily reversal. If it moves lower from here it could target 102.59 or 102.00. If the recent uptrend continues, it might encounter resistance at the 100-day moving average at 104.72.