European stocks enjoyed another positive session yesterday, driven once again by the travel, hospitality and commercial real-estate sector.
A sharp rise in longer-term bond yields did initially act as a drag, however as they slipped back from their intraday peaks, stocks reasserted their dominance. The rise in yields could also be an attempt by the markets to test the resolve of central banks, in terms of their willingness to push back on the recent sharp rise in long-term borrowing costs. For now, central banks don’t appear to be that worried, with little in the way of concern being expressed by US Federal Reserve officials, or for that matter by Bank of England policymakers when they appeared in front of the Treasury Select Committee yesterday.
Various Fed officials continued to play down the threat of higher rates, with both vice-chair Richard Clarida, and permanent Fed governor Lael Brainard, weighing in as well, while Powell said that higher rates were a natural consequence of an economic recovery story. While that is certainly true, there is no escaping the fact that after years of low or negative real rates, there is the possibility that real rates might be about to move quite a bit higher. While that may be manageable for some, there are others that might find the prospect of that a little more concerning, particularly in Europe, where debt levels in some parts are eye-wateringly high, and likely to get higher.
After a negative start, US markets underwent a turnaround in fortune with the Dow leading the way, powered by energy and financials, while big tech lagged behind. After last night’s record close for the Dow and subsequent rebound in the S&P 500 and Nasdaq, markets here in Europe look set to open higher, encouraged by the prospects of a continued reopening, and central banks that are in no hurry to pare back their stimulus attempts, as Asia markets reversed yesterday’s declines.
Today we get to see the next iteration of US Q4 GDP, which is expected to edge a little higher to 4.2%, from the 4% level a few weeks ago. This is still a sharp slowdown from the 33.4% seen in Q3, but the upward revision is likely to be as a result of a slight upward adjustment to consumption. One of the main reasons Q3 GDP was so positive, was because personal consumption came in at 41%. We already know that this week’s second iteration of Q4 GDP numbers is set to be much weaker, however we could see a slight upward revision from the 4% level a few weeks ago, to 4.2%.
All of this is rather moot given that since the beginning of the year we’ve seen a significant pickup in economic activity after the weak end to Q4, which means these numbers aren’t likely to move the dial that much. This is because we’ve seen a new stimulus deal get passed of $900bn with the prospect of another larger deal of $1.9trn in the coming weeks.
US non-farm payrolls have started to look more positive, as has consumer spending with a strong rebound in January retail sales, while weekly jobless claims have started to come back down again, and though we did see a surprise rise to 861,000 last week, these are expected to slip back towards 828,000 this afternoon.
EUR/USD – looking set for a move through 1.2180 area and 50-day MA, with a break higher targeting the highs this year at 1.2350. Support remains back towards the 1.2070 level. This remains a key support, with a move below 1.2060 reopening the risk of a move towards 1.1980.
GBP/USD – made a new multiyear high of 1.4240 before slipping back, however still remains on course for the 2018 peaks at 1.4380. We can’t rule out the prospect of a dip back to the 1.3820 area, and last week’s lows, but while above the bias remains for a move higher.
EUR/GBP – continues to fall back, dropping below the 0.8600 area, which was a key support level. We appear to have rebounded quite strongly from the 0.8540 area, which could see us squeeze back towards 0.8630. The 2020 lows at 0.8280 are the next key support, however we could squeeze back towards the 0.8770 area first.
USD/JPY – found support earlier this week at the trend line from the January lows currently at the 104.60/70 area. Below that targets the 103.80 area. The current rebound could well see us move back to the highs this month at 106.22, and possibly higher.