ECapital markets started the new month in the spotlight yesterday as lower bond yields combined with hopes of a US stimulus boosted sentiment.
Last week, stocks came under pressure to sell as higher yields on government bonds served as an excuse for brokers to reduce their positions in equities – the indices were coming from a relatively high position.
Concerns about rising inflation drove the rise in yields. Commodity prices are on the rise as markets estimate demand for minerals will increase in the coming months as economies need to ease restrictions. Higher inflation seems to be inevitable as we saw multi-year highs in metals and oil recently hit a 13-month high. That being said, the Federal Reserve does not appear to be very concerned about rising inflation or bond yields, while the ECB has indicated it will change its bond buying program in order to keep yields in check.
With the stock markets losing ground last week, traders were content to recover relatively cheap stocks yesterday. It was a broad rally, as stocks in banking, retail, travel, transportation, commodities, real estate and consumer rose. Major European indices gained at least 1.5%, while the S&P 500 jumped 2.38%.
Over the weekend, the House of Representatives backed the proposed $ 1.9 trillion stimulus package presented by President Biden. Senators are currently debating the spending plan, so there are hopes that it will be approved soon.
The bullish mood was not limited to equities as metals and oil also benefited from the rally, but some commodities returned earlier gains towards the end of the day.
Overnight, the RBA kept rates at 0.1%, meeting expectations. Australia’s central bank has made it clear that it will not hike rates until inflation hits its 2-3% target sustainably, with the CMC AUD index slightly lower. In light of the recent surge in bond yields, the RBA wanted to insist that it will not be tightening its policy anytime soon. Asian equity markets took advantage of early trading gains, but bullish sentiment has faded so they are now in the red. European markets are on track to return some of yesterday’s big gains.
The British vaccination program is still going well as more than 20 million people have been vaccinated. As the program progresses, the UK is on the verge of lifting some of its restrictions. The CMC GBP Index was in positive territory for much of yesterday, but the bullish movement faltered towards the end of the session.
Judging by the manufacturing PMI reports published yesterday in Europe, it appears that activity in the eurozone and the UK has not been too affected by the health crisis. Readings from Spain, Italy, France, Germany and the UK all showed increases on the month, with Germany’s reading being the fastest growth rate in three years.
Bank of England (BoE) consumer credit for January was – £ 2.39 billion, a sharp drop from – £ 0.87 billion recorded in December. Considering the 8.2% drop in UK retail sales in January, it seems clear that consumers were content to cut back on spending, possibly due to the uncertain economic environment. Much has been said about releasing pent-up demand once restrictions are relaxed, but in light of this data, that might not be the case.
The US ISM’s manufacturing PMI for February was 60.8, the fastest rate of expansion in two and a half years, adding weight to the argument that the economic recovery American is still strong. The components of employment and new orders were 54.4 and 64.8, respectively, both of which posted increases during the month. Prices paid in metric went from 82.1 to 86, which corresponds to the broader idea that inflation is set to rise. Later this week the U.S. non-farm payroll report will be announced, the robust employment reading of 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 expected to remain at 6%, unchanged from January. The unemployment trend reading is -13,000, keep in mind the previous update was -41,000. The data will be released at 8:55 am UK time.
At 10am UK time the Eurozone CPI reading will be released, economists expect the level to hold at 0.9% while the core reading is expected to cool by 1, 4% to 1.1%. Last week we saw a rise in German and French government bond yields as there were rampant concerns about higher inflation, so today’s updates should give us a measure of the demand in the currency area.
Canadian GDP in the fourth quarter is expected to stand at 7.5% on a quarterly basis. That would be a significant drop from the 40.5% recorded in the third quarter, but a high single-digit growth percentage would nonetheless be impressive. It should be remembered that the US economy grew 4.1% in the last quarter of 2020. Details will be released at 1:30 p.m. UK time.
EUR / USD – although it holds below the 50 day moving average at 1.2147, the recent bearish move is likely to continue. A move below 1.1952 could see 1.1800 come into play. A break above 1.2242 should result in 1.2349.
GBP / USD – since the end of September it has been in an uptrend, it hit a 34 month high last week. If the positive movement continues, it should retest 1.4000. A pullback could find support at 1.3715, the 50-day moving average.
EUR / GBP – has been in a downtrend since mid-December last week, it fell to an 11-month low, and further losses could be targeting 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 movement continues it should target the 108.00 area. A pullback from here could find support at 105.49, the 200-day moving average.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states opinions) is for general information purposes only and does not take into account your personal circumstances or goals. Nothing in this document is (or should be considered) financial, investment or other advice on which to rely. No opinion given in the Material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any particular person. The material has not been prepared in accordance with legal requirements aimed at promoting the independence of investment research. While we are not specifically precluded from processing before providing this material, we do not seek to take advantage of the material before it is released.