Sentiment in stocks this week has been slowly eroded as the bullish mood that circulated on Monday has since turned a little bearish.
At the start of the week, the outlook was upbeat on account of optimism connected to the vaccine rollout. The UK confirmed that it was on track with its vaccination distribution scheme and so this lifted spirits across the board and underpinned the recovery rally. The prospect of a $1.9 trillion stimulus package from the US was in the ether too.
In the middle of the week, the US 10-year yield hit a one-year high, which triggered worries about the possibility of higher inflation. The result was that stock markets came under a little pressure. Yesterday the bearish move gained a little momentum and losses were seen in Europe and the US. An absence of good news, combined with some disappointing corporate results, as well as mixed economic data from the US, weighed on the confidence in stocks.
The US jobless claims reading rose to 861,000, a four-week high. In light of the disappointing US non-farm payrolls report at the start of the month, the jobless claims news sped up the already negative move in US index futures.
The bearish move on Wall Street spilled over to Asia, where indices are in the red. A mixed start is anticipated for European markets.
Import prices in the US in January were 0.9%, which was a big swing from the -0.3% in the previous update It adds weight to the view that higher inflation is in the pipeline for the US, so those fears might resurface in the near-term.
The US dollar index hit its highest mark in over one week on Wednesday but it cooled yesterday, as the jobs data put extra pressure on the greenback. Even though the dollar lost ground yesterday, the uptrend since early January remains intact so it could be experiencing a pause in the wider positive move.
Copper racked up a nine-year high. The red metal has been trending higher lately on hopes the global economy will recover. Yesterday was the first trading session in mainland China after the Lunar New Year. It doesn’t seem like a coincidence that the red metal jumped after China got back to business.
Oil registered a new 13-month high yesterday but it rolled over on itself as the wider negative sentiment in the markets prompted profit taking. Some refineries in Texas have been shut due to the big freeze, so near-term demand woes hit crude prices. The EIA report showed that US oil inventories fell by 7.25 million barrels, a far bigger draw than expected. The update led to a short-lived rebound in oil but the energy finished in the red.
At 7am (UK time), the UK retail sales report will be posted. Economists are predicting a reading of -2.5%, which would be a sharp fall from the 0.3% growth registered in December. The report that strips out fuel sales is predicted to fall by 2.6%. Last Friday, it was confirmed the UK economy grew by 1% in the final quarter of 2020, which beat the 0.5% forecast. The economy grew by 16.1% in the third quarter. A technical recession is defined as two consecutive quarters of negative growth, so a double dip recession has been avoided for now. In January, the Bank of England (BoE) warned the UK economy could contract by approximately 4% in the first quarter of 2021, as the lockdown is likely to curtail economic activity. With respect to today’s retail sales reports, traders are already bracing themselves for poor figures so sterling is unlikely to suffer unless the update is dire.
At the same time, UK public sector net borrowing for January will be announced and the reading is tipped to be £24.5 billion, down from £34.1 billion in December.
The flash readings of manufacturing and services for February from France and Germany will be announced this morning. France has strict restrictions in place, while Germany remains in lockdown. French manufacturing and services PMI are tipped to be 51.4 and 47.0 respectively - both would be small declines on the month. Details will be released at 8.15am (UK time). Germany’s manufacturing and services readings are predicted to be 56.5 and 46.5 respectively, which would be a small dip on January’s levels.
Services account for approximately 70% of the UK’s output so the services data will be closely watched. The flash reading of UK services is expected to be 41, up from 39.5 last month, while the manufacturing report is predicted to dip from 54.1 to 53.2 in February. The figures will be posted at 9.30am (UK time). In light of the BoE forecast for the first quarter, it will probably take dreadful readings to derail sterling’s recent rally. Yesterday, GBP/USD hit a new 34-month high and EUR/USD dropped to an 11-month low.
Canadian retail sales for December are expected to decline by 2.5% and that would be a sizeable fall from the 1.3% growth posted in November. December is traditionally a busy shopping month so a negative report would say a lot about consumers’ willingness to spend. It will be announced at 1.30pm (UK time).
The flash reading of US services and manufacturing are predicted to be 57.6 and 58.5 respectively. More attention will be paid to the services update as the industry accounts for roughly 70% of the US’s GDP. The details will be posted at 2.45pm (UK time).
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 1.3628, the 50-day moving average.
EUR/GBP – has been in a downtrend since mid-December, yesterday it dropped to an 11 month low, and further losses might target 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.