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Europe pointing to lower start as bulls take a breather

Equity markets started off the new month on the front foot yesterday as lower bond yields combined with stimulus hopes from the US boosted sentiment. 

Last week, stocks saw some selling pressure as increases in government bond yields acted as an excuse for dealers to reduce their equity positions – indices were coming from a relatively high position.

Worries that we are in for higher inflation were the driving force behind the move higher in yields. Commodity prices are on the rise as there is a view in the markets that mineral demand will increase in the months ahead as economies should loosen restrictions. Higher inflation seems like a foregone conclusion since we have seen multi year highs in metals and oil registered a 13 month high recently. That being said, the Federal Reserve doesn’t seem that worried about an increase in inflation or bond yields, while the ECB indicated they would amend their bond buying scheme as a way of keeping yields under control.

Seeing as equity markets lost ground last week, traders were content to pick up relatively cheap stocks yesterday. It was a broad-based rally, as banking, retail, travel, transport, commodity, property and consumer stocks saw gains. The major European indices gained at least 1.5%, while the S&P 500 jumped 2.38%.

Over the weekend, the House of Representatives supported the proposed $1.9 trillion stimulus package put forward by President Biden. Senators are now debating the spending scheme, so there are hopes it will be signed off soon. The bullish mood was not just confined to stocks as metals and oil enjoyed rallies too but some of the commodities handed back earlier gains toward the end of the day.

Overnight, the RBA kept rates on hold at 0.1%, meeting expectations. The Australian central bank made it clear it will not be hiking rates until inflation is sustainably within their 2-3% target. The CMC AUD Index is fractionally lower. In light of the recent spike in bond yields, the RBA wanted to hammer home the point that it won’t be tightening its policy anytime soon. Stock markets in Asia enjoyed gains in early trading, but the bullish sentiment faded so now they are in the red. European markets are on track to hand back some of yesterday’s strong gains.       

Britain’s vaccination programme is still going well as more than 20 million people have been vaccinated. As the scheme ticks along, the UK edges closer to unwinding some of its restrictions. The CMC GBP index was in positive territory for much of yesterday, but the bullish move ran out of steam towards the end of the session.

Judging by the manufacturing PMI reports that were posted in Europe yesterday, it appears that activity in the eurozone and the UK hasn’t been impacted too badly by the health crisis. The readings from Spain, Italy, France, Germany and the UK all showed increases on the month. Germany’s reading was the fastest rate of growth in three years.        

The Bank of England’s consumer credit reading for January was –£2.39 billion, which was a big drop from the -£0.87 billion registered in December. When you take into consideration the 8.2% fall in UK retail sales in January, it seems clear that consumers were content to curtail their spending, possibly due to the uncertain economic environment. There has been a lot of talk about pent-up demand being released once the restrictions are relaxed but in light of this data, that might not be the case.      

The US ISM manufacturing PMI reading for February was 60.8, it was the fastest rate of expansion in two and a half years, so it adds weight to the argument the US economic recovery is still strong. The employment and new orders components were 54.4 and 64.8 respectively, which both showed increases on the month. The prices paid metric jumped from 82.1 to 86, so it ties in with the wider view that inflation is set to rise. Later this week, the US non-farm payrolls report will be announced, the robust employment reading from the ISM update could be an early indication for the important jobs report.  

At 7am (UK time), the German retail sales report will be announced. The consensus estimate is -0.3%, which would be a huge rebound from the -9.6% posted in December. Germany’s unemployment rate is tipped to hold steady at 6%, unchanged from January. The unemployment change reading is tipped to be -13,000, an improvment on the previous -41,000. The data will be posted at 8.55am (UK time). At 10am (UK time) the eurozone CPI reading will be posted, with economists expecting the level to hold steady at 0.9%, while the core reading is predicted to cool from 1.4% to 1.1%. Last week we saw a rise in German and French government bond yields as there were creeping concerns about higher inflation, so today’s updates should give us a gauge of demand in the currency area.

Canadian GDP in the fourth quarter is predicted to be 7.5%, on a quarterly basis. It would be a major fall from the 40.5% registered in the third quarter but a high single digit percentage growth would be impressive nonetheless. It is worth remembering the US economy grew by 4.1% in the last quarter of 2020. Details will be published at 1.30pm (UK time).

EUR/USD – while it holds below the 50-day moving average at 1.2147, the recent bearish move should continue. A move below 1.1952, might bring 1.1800 into play. A break above 1.2242 should bring 1.2349 into play.

GBP/USD – since late September it has been in an uptrend, it hit a 34 month high last week. If the positive move continues, it should retest 1.4000. A pullback might find support at 1.3715, the 50-day moving average.   

EUR/GBP – has been in a downtrend since mid-December, last week it dropped to an 11 month low, and further losses might target 0.8400. A rally above 0.8730 should put the 0.8800 area on the radar.   

USD/JPY – has been in an uptrend since early January, yesterday it hit a six month high. If the positive move continues it should target the 108.00 area. A pullback from here could find support at 105.49, the 200-day moving average.    

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