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Europe set for mild recovery, US data in focus

In recent weeks global stock markets have been in rude health as traders have been banking on the Biden administration to approve the proposed $1.9 trillion stimulus scheme. 

In addition to that, the progress made with respect to the distribution of vaccines has added to the positive move too. On Monday, it was confirmed the UK hit its vaccine target – vaccinating 15 million people by 15 February. The update triggered chatter that Britain could ease up on some of its restrictions in the next few weeks, so that contributed to the wider view the global economy will recover from the pandemic in the months ahead.

It wasn’t just stocks that benefitted, commodities rallied too. Recently we have seen oil hit a 13 month high, platinum reached its highest mark since September 2014, and copper hit an 8 year high. It was smooth sailing in the markets for a while but the boat was rocked a little when the yield on the US 10 year government bond hit a 12 month high on Tuesday. Dealers became a little nervous about the move in yields as it could be interpreted the markets are anticipating higher inflation down the line. It also might reflect the view that growth prospects are optimistic too. Either way, it could put the Federal Reserve in a difficult position as higher yields could lead to chatter about hiking rates, but the central bank has talked about maintaining rates near zero until 2023. Yesterday, European stocks finished in the red, while the S&P 500 closed fractionally lower due to a sell off in tech stocks. Traders are not running scared of the situation in the US bond market but it was enough to take some of the heat out of global stocks.

Trading resumed in mainland China after the Lunar New Year celebrations, the CSI 300 is in the red. Losses are being incurred in Hong Kong and Japan too. European equity markets are set for a quiet start.  

Yesterday it was revealed that US retail sales in January surged by 5.3%. It appears the stimulus cheques that were a part of December’s $900 billion coronavirus relief package spurred on the aggressive spending. Pumping money back into the economy was the aim of the policy but the momentum is likely to fizzle out. The PPI update for January jumped by 1.3% on a monthly basis – its largest increase since 2009. It also adds to the speculation that inflation will rise.   

The minutes from last month’s Fed meeting were published last night and it showed the central bank is keen to have an accommodative policy to help assist the economy. It wasn’t exactly new information but the message was that monetary policy is unlikely to change anytime soon as the economy still has a long way to go before the Fed reaches its targets.   

Relatively high yields underpinned the rally in the US dollar, the impressive sales data added to the positive move. The greenback hit its highest level in over one week, which prompted GBP/USD to retreat from its 34 month high. EUR/USD lost ground too.

Metals suffered yesterday due to the overall slightly downbeat mood in the markets. The firmer greenback compounded the problems as the assets are traded in US dollars, so a more expensive dollar, impacts their demand. Gold dropped to its lowest mark in over two months, but it was already trending lower since early January. Copper and platinum were dented by a little profit taking.

Bitcoin extended its gains as it traded north of $52,000, setting yet another all-time high.             

A number of US economic reports will be posted at 1.30pm (UK time). The jobless claims update is predicted to fall from 793,000 to 765,000. Should the reading fall below 779,000 it would be the lowest level since early December.  

The Philly Fed manufacturing index is expected to slip from 26.5 to 20.0. Earlier in the week, the US empire manufacturing index for February jumped to 12.1, its highest reading in five months. The building permits and housing starts updates are predicted to be 1.67 million and 1.65 million respectively.  

The EIA report is predicted to show that US oil stockpiles will fall by 2.42 million barrels, while US gasoline inventories are tipped to increase by 1.39 million barrels The data is likely to be skewed by the adverse weather in the southern part of the country. Oil eked out a new 13 month high yesterday on account of the big freeze in Texas, production was impacted. It was reported yesterday that Saudi Arabia is keen to increase output when the global economy recoveries, but if the report is accurate, we are unlikely to see any changes to production in the near term.                 

EUR/USD – while it holds below the 50-day moving average at 1.2151, the recent bearish move should continue. A move below 1.1952, might bring 1.1800 into play. A break above 1.2200 should bring 1.2349 into play.

GBP/USD – since late September it has been in an uptrend, it hit a 34 month high yesterday. If the positive move continues, it could target 1.4000. A pullback might find support at 1.3624, the 50-day moving average.   

EUR/GBP – has been in a downtrend since mid-December and further losses might target 0.8670 or 0.8600. A rally from here could see it hit the 0.8800 area.   

USD/JPY – has been in an uptrend since early January and if the positive move continues it should target the 107.00 area. A pullback from here could find support at 104.44, the 100-day moving average.    

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