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Europe poised for modest rebound

Europe poised for modest rebound

Equities sold off yesterday as last week’s bullish mood was swapped for a more cautious attitude. 

There was an absence of positive news yesterday, so the stories about the health crisis were at the centre of attention. The Chinese authorities announced the country registered its highest daily rise in coronavirus cases in five months. China has held up relatively well in terms of the health emergency, so the resurfacing of the crisis rippled through the markets. Germany, France and the UK continue to endure high case numbers too.

The fall in stocks yesterday needs to be put in the context of the large gains posted last week. For some time there was chatter that equities were looking lofty, so a move to the downside wasn’t exactly a surprise. In recent sessions, the speculation that US president-elect Joe Biden will map out new stimulus plans has dominated the headlines. Also the vaccine news is assisting the upbeat sentiment. Stocks on both sides of the Atlantic fell yesterday, but traders haven’t lost sight of the Biden and vaccination rollout stories.

The NASDAQ 100 was the underperformer of the US indices due to fears that big tech companies, in particular social media firms, could come under tougher regulation. President Trump’s Twitter and Facebook accounts have been suspended because of allegations that his comments sparked the riot in the Capitol building last week. People have been questioning the role of social media firms in light of the incident, so the groups have found themselves under extra scrutiny.

The Democrats introduced an article of impeachment against President Trump yesterday. The move sends out a powerful message, but in reality it will be difficult to remove him from office because the Democrats might not get a majority to back the article in the House of Representatives, with lawmakers on holiday. Timing is a factor too as Mr Trump will leave office in just one week. It was reported the FBI warned that there might be armed protests across US cities ahead of Biden’s inauguration.     

The major stock markets in Asia are largely higher. China’s CSI 300 is up over 1.4%, the Hang Seng is close to its one-year high and the Nikkei 225 is showing small gains. European indices are expected to recover some of yesterday’s losses. 

The US dollar index hit a three-week high as the currency’s recovery continues. Since last Wednesday the greenback has shrugged off a poor ADP employment report as well as a mixed non-farm payrolls update. Last week’s low could provide a floor for the dollar in the near-term. Robert Kaplan, Dallas Fed president, said that if the US economy has sufficient growth this year, the talk about tapering the bond buying scheme should begin. Commentary like that should assist the dollar. 

Broadly speaking, commodities suffered yesterday. Lately, metals, as well as oil contracts, have been in high demand as stimulus chatter circulated. Hopes that mass vaccinations will heal economies also contributed to the bullish sentiment. With the exception of gold, metals came under a lot of pressure because of the firmer US dollar, while profit-taking was a factor too. Gold was caught between the firmer dollar and safe-haven buying so its range was relatively small. Oil pulled back from its 11-month high that was achieved on Friday.        

Bitcoin eyed $42,000 on Friday but yesterday it traded in the region of $30,300. The cryptocurrency is no stranger to high volatility, and is currently trading around $35,700. Despite the heavy losses incurred in the past few days, bitcoin is up roughly 22% year-to-date.

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 1.3356, 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. A retaking of 0.9000 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 104.76. Should the wider bearish move continue it could target 102.00.