Marius Paun | London, UK | Senior dealer | Thursday, 18th February 2021
The US stocks fell sharply on Thursday afternoon with Dow Jones retracing 300 points after the Labor Department released a disappointing weekly initial jobless claims report. The data showed a jump to one month high, 861,000 vs 765,000 expected, raising fresh questions as to whether the labor market recovery has stagnated. We saw a string of better than anticipated economic numbers lately, so this one brings worries the ongoing pandemic may delay the overall economic rebound.
Another reason for the fall was bonds yields pushing higher, thus fuelling concerns that increased borrowing costs could snap the current rally to record highs. In particular, yields on 10-year US Treasuries rose to 1.31%, the top for the year. As a result, the tech sector, one of the main drivers so far, is looking especially vulnerable to inflationary pressures.
However, the Dow is still within touching distance of its all-time high. Furthermore, it reached another record high yesterday as the earnings season continued to beat consensus, which was a good omen for stocks. There will be over 700 companies reporting their figures this week and more than 1,000 next week. If the positive surprises continue, we could see the rally resuming.
The next stimulus package is anticipated to be passed by mid-March as the extended federal unemployment benefits will start to expire on March 14th. First, the House of Representatives is expected to pass the proposed $1.9 trillion bill by the end of February and the Senate is expected to follow suit by the middle of next month.
The drop in coronavirus figures is another bullish feature for both the real economy and stock markets as more and more areas can reopen after the lockdown. Yes, the current snowstorm (see Texas disruptions) has caused some stress, already delaying the reopening. But once the weather gets better, the markets expect the pent-up demand to trigger quite a boom.
Meanwhile, jobless claims numbers aside, the economic data continued to impress. Even with the national vaccination program underway although possibly behind the initial plan, data indicated a strong recovery coming out of the pandemic. Retail sales report showed a better than anticipated 5.3% increase month on month vs expectations for 1.1%. It is the biggest rise in seven months to January and thought to be a consequence of government stimulus lifting consumer spending.
Additionally, the Federal Reserves’ latest meeting minutes indicated the US Central Bank is in no mood to give up its aggressive asset purchasing program and /or the low-interest rates pledge to boost economic growth.
So yes, the Dow together with the major US indices might look a bit toppy and a further pullback could be on the cards but is it enough to stop the current bull run even allowing for rising yields and inflation?
The Dow continued its advance from the last report on November 20th as bulls remained in control. The chart shows a steady rally interrupted briefly by a short-lived selloff at the end of January/ beginning of February this year. It even made a new all-time high at 31,724 two days ago. The short-term moving averages (red line) is back above the long-term MA (blue line) and both are again pointing upwards.
On the upside, the bulls tried to push the price back above 31,700 this morning but failed to do so which triggered the selloff. A close above it could build momentum and spur renewed buying with a retest of the record high. The flattening of the short-term MA during the last two sessions could indicate that consolidation around the current levels is also a possibility. On the downside, 31,250 – 31,300 range should act as the first line of support. Bears will also look for a break below the psychologically important 31,000 marks to attract extra selling power.
Marius Paun | London, UK | Senior dealer | Friday 12th February 2021
The Lunar New Year Is Upon Us
We saw inflation data coming out in the US this week showing a rise of 1.4% vs +1.5% expected for CPI. But it was the employment number which was the main concern. The US Fed Jerome Powell reiterated this week that his central bank is strongly committed to doing everything it can to promote employment but that the monetary policy will not be tightened ‘solely in response to a strong market’.
On the other hand, the US Treasury Secretary Janet Yellen said the US could reach full employment next year(!) if the $1.9 trillion stimulus package is approved. If anything, her stance on inflation, that it is ‘ the most important risk’ was not doing enough amid too many small businesses closing.
The US stocks closed mixed yesterday but not far from all-time highs with the Dow Jones touching a fresh record high.
Beijing reported that foreign direct investments into China rose 4.6% year on year in January. Its CPI dropped 0.3% vs consensus 0%. Chinese markets will now be closed for about a week, starting on Thursday, due to the Lunar New Year holiday. As a result, the Asian markets are anticipating reduced liquidity.
The European Central Bank President Christine Lagarde also commented on inflation saying that January’s rebound was expected and figures will continue to improve in the next month. She added that fiscal measures should be temporary and that significant monetary stimulus ‘remains essential’.
The UK economy shrank by 9.9% overall last year, the most since 1709, we learned on Friday, with like for like retail sales +7.1% year on year vs +4.8% previously. Prime Minister Boris Johnson gave some worrying news ‘we should start to think about Covid vaccine as a regular jab’. Nonetheless, the pound sterling remains on the offence against the US dollar trading around 1.385 going into the weekend.
Gold prices tried to push higher but found good resistance at $1855 and subsequently retraced to $1823, marginally higher for the week.
Bitcoin is again making headlines surging to over $49,000, a fresh all-time high. The driver was Tesla announced that it bought $1.5 billion worth of Bitcoin and perhaps more importantly it plans to accept payment in Bitcoin soon. In reaction, Mastercard said will start supporting select cryptocurrencies. And more are expected to follow.