A strong Friday session saw European markets close a fairly lacklustre week very much on the front foot, and ensured a second week of gains. US markets also continued their run of record highs, all setting new record closes, with the US small cap Russell 2000 index very much leading the outperformance.
Since the end of October, the Russell has gained over 40% on expectations of an economic rebound, fuelled by an additional $1.9trn US stimulus plan, on top of the $900bn that was approved in late December.
This morning the Nikkei 225 marked a new milestone, nudging above the 30,000 level for the first time since 1990, with a number of markets still closed for lunar new year. Japan’s economy recorded a 12.4% annualised rebound in Q4, a decline from the 22.7% rebound seen in Q3.
The FTSE 100, which has underperformed in recent weeks, also finished higher for the second week in succession, though it still remains well below its January peaks, unlike its peers elsewhere, as markets shrugged off Friday’s UK GDP data which showed that annual economic output saw its biggest decline since 1709. While the 1709 headline grabbed all of the attention, it rather distracted from the fact that the UK economy appears to have avoided a double-dip recession, and more importantly from an economic point of view, the UK’s vaccine rollout programme is much further advanced than everyone else’s in Europe as the government met its target of 15m people getting their first jab by 15 February.
Assuming everything else goes according to plan, this opens up the prospect that we could see a slow easing of restrictions sooner rather than later, with the next update on measures due a week today. This raises the much-discussed prospect of an explosion of pent-up demand, as consumers ramp up their spending in a form of post-lockdown boom, with up to £150bn of excess savings unleashed over the next few months, with a similarly robust rebound predicted in the US as well, as new stimulus payments trickle down into the US economy.
Over the course of the past few days markets appear to be giving the impression of being caught in two minds, between the risks surrounding a sharp rise in inflation, reflected in a rise in higher long-term rates in global bond markets, against increasing optimism around a summer easing of restrictions alongside a successful vaccine rollout plan.
US 10-year yields closed at their highest level since February last year at 1.21% at the end of last week, while the spread between 10-year and 2-year yields rose to its widest level in four years, despite a raft of Fed speakers insisting that they are set to remain on hold until there is sufficient evidence that the US economy is back near full employment. Fed chairman Jay Powell reiterated this very message in the strongest possible terms last week, saying that any inflationary spike was likely to be temporary in nature, with the real risk we could see a slip back towards deflation if the labour market recovery is slow.
With US markets closed today, and the Nikkei 225 setting a new milestone over 30,000, European markets look set for a similarly positive start to the week, with the main focus likely to be on this week's Fed minutes, which are due on Wednesday, and the latest UK inflation, retail sales and public finances data for January at the end of the week.
We also have the latest flash PMI numbers for February from France, Germany, the UK and the US, which are unlikely to have improved that much on the numbers we saw in January, with the US still well out on front in both services and manufacturing.
Bitcoin continued to make new record highs over the weekend, edging closer to the $50,000 level after last week’s surprise revelation that Tesla had taken the decision to plough $1.5bn into the cryptocurrency, with a view to making it a means of payment. Despite some widespread scepticism about the wisdom of such a move, it would appear that it has prompted a sea-change in attitudes, with more and more investors unwilling to stay on the sidelines, in case they miss out.
The admission by Mastercard that it might allow its cardholders to transact in some cryptocurrencies has added to the frenzy, along with reports that Morgan Stanley Investment might be looking at it as a possible investment asset. It would appear that the move higher in bitcoin is becoming the latest FOMO trade.
EUR/USD – found support at the 1.1950 area earlier this month, rebounding back above 1.2070 and closing in on the 50-day MA which for now is holding the upside. While below the 1.2170 area the risk remains for a move back to the lows on a break below 1.2060, and towards 1.1800.
GBP/USD – has finally overcome the 1.3750 area, pushing up to the 1.3860 level on the way towards 1.4000. Support now comes in at the 1.3750 area, with bigger support at the 1.3600 area.
EUR/GBP – the break below the 0.8860 level is a key moment for a move towards the 0.8600 area. While below 0.8860 the bias remains for more euro weakness towards the May 2020 lows at 0.8670 initially. Initial support currently at the lows this month at 0.8740.
USD/JPY – the current bout of US dollar strength ran into resistance at the 200-day MA at 105.60, before slipping back. Support comes in at the trend line from the January lows currently at the 104.40/50 area. A move below 104.00 signals a move back towards 103.50.