Calm has been restored to equity markets as the violent swings that were witnessed due to the Reddit-retail investor mania have waned.
Volatility in Gamestop – the stock at the centre of the saga – has cool greatly and that has in turn brought the temperature down in the markets. Trader’s attention drifted back to topics such as lockdowns, vaccination rates as well as a US stimulus package. The prospect of the Biden administration signing off on a relief package of some shape or form has been the biggest driver of stocks recently. President Biden is determined to spend $1.9 trillion on assisting the US economy, but in the near-term he might have to settle for a package worth $618 billion – which would have the backing of a group of Republican senators.
Italian politics was in play yesterday as it was announced the former head of the ECB, Mario Draghi, is tasked with trying to establish a new government. The FTSE MIB outperformed on the news but just because ‘Super Mario’ had success with steering the euro through the sovereign debt crisis, doesn’t necessarily mean he will replicate that success in domestic politics. In recent years, The Five Star Movement and The League Party have come to prominence. Both have yet to make a decision whether to work Mr Draghi or not.
Oil had another good day yesterday as OPEC+ left their production on hold. The EIA report injected volatility into the market. The consensus estimate, was that oil stockpiles would increase by 446,000 barrels but they fell by 994,000 barrels to 475.7 million barrels – the lowest since March 2020. Falling inventories supported the energy but the positive move was balanced out by the fact that gasoline stockpiles surged by 4.46 million barrels. Sticking with the commodity theme, silver posted a respectable gain yesterday following Monday’s major rally and Tuesday’s painful tumble.
Equity markets in Asia have fallen on tighter liquidity conditions in China. Short-term borrowing costs in the country ticked up so that lead to fears the Beijing administration are trying to rein in credit, possibly to curb growth in property and stock prices. European indices are on track to open lower.
The Bank of England (BoE) is expected to leave monetary policy on hold. The decision will be announced at 12pm (UK time), 30 minutes later the press conference will commence. It is predicted that all nine members of the MPC will vote to leave rates at 0.1% and the asset purchase scheme at £895 billion. In November, the BoE upped the stimulus package from £745 billion to £895 billion but a lot has changed since then, some developments have been negative, while others have been negative.
Tough restrictions on the UK economy were extended into December, which were subsequently rolled over again in the New Year. Similar measures happened in other European nations. The final reading of the UK services PMI report for January slumped to 39.5, an eight month low. December is a major shopping month due to Christmas but the retail sales reading was 0.3%, which was nowhere near the 1.4% forecast.
On a more positive note, the UK-EU trade agreement was announced in late December, greatly helping trade between Britain and the bloc. The UK has one of the best vaccination roll out systems in the world, approximately 15% of the population has been vaccinated, whereas Germany’s metric is in the region of 3%. On several occasions in 2020, Andrew Bailey, the BoE chief, mentioned the possibility of introducing negative rates. The central banker didn’t seem wedded to the idea but the very mention of the policy sparked concern. Last month, Mr Bailey described negative rates as ‘controversial’, which pushed up sterling. Dealers took that as a sign that rates are unlikely to be cut below zero. On balance, it appears the UK’s outlook is more positive now than it was in November. We could hear Mr Bailey try and distance himself even further from the idea of negative rates. Sterling has been trending higher recently, earlier this week, the CMC GBP Index hit its highest level since March 2020.
At 9.30am (UK time) the UK construction PMI update will be posted, economists are expecting 52.9, down from 54.6 in December.
Eurozone retail sales are anticipated to be 1.6%, which would be a massive rebound from the -6.1% registered in November. The details will be announced at 10am (UK time).
The US initial jobless claims reading is tipped to cool from 847,000 to 830,000, while the continued claims level is anticipated to be 4.7 million, down from 4.77 million. Yesterday’s ADP employment update was a pleasant surprise as it showed that 174,000 jobs were added last month, and that smashed the 49,000 forecast. In addition to that, December’s report was revised upward from -123,000 to -78,000. When you combine the updates, it shows that 96,000 jobs were added in the previous two months.
EUR/USD – while it holds below the 50 day moving average at 1.2138, the outlook should remain bearish. 1.2000 or 1.1923 could act as support. If the broader uptrend continues it could retest 1.2349
GBP/USD – since late September it has been in an uptrend, last week it hit a 33 month high. If the positive move continues, it could target 1.4000. A pullback might find support at 1.3532, the 50-day moving average.
EUR/GBP – has been in a downtrend since mid-December and further losses might target 0.8800 or 0.8670. Yesterday’s candle has the potential to be a hammer formation, a rally from here could see it hit 0.8995, the 200-day moving average.
USD/JPY – since early January it has been moving higher and overnight it hit an 11 week high. While it holds above the 50-day moving average at 103.89, the bullish trend should continue and it might bring 106.00 into play. A move back through 103.89, could see it target 102.59.