A morning to watch and wait?

The markets are drifting this morning as investors hang on to gains but have growing concerns over the vaccine rollout, weak data, the Republican push back on the US stimulus package and the potential for an election in Italy. 

There has been Republican push back on the US fiscal stimulus bill.  Given that a super majority is needed in the Senate to pass it Biden would have needed 10 Republicans on his side.  This could drag out the process and end up resulting in a more conservative stimulus package.  Chuck Schumer has indicated that the stimulus plan won’t be ready until mid-March.

Moderna is planning to begin human studies of a booster for its vaccine to protect against the South Africa virus variant.  Top scientists, including Anthony Fauci in the US, are now suggesting that the mutations could reduce the efficacy of the current vaccine.  UK Health Minister Matt Hancock also expressing similar concerns.

German IFO was weak yesterday showing the impact of the second wave of the virus and corresponding restrictions.

Italian PM Conte is set to resign today to seek to form a new government. If his efforts fail Italy could be forced into early elections. It is not an opportune time for elections given the pandemic and plans needed for spending the EU recovery fund money.

It seems to be becoming clear that travel restrictions will be needed to stem the spread and prevent more mutations. The UK is already looking to implement Australia style quarantine rules on arrival this could become a common global practice, which could lead to a stronger bout of risk aversion.

A slow vaccine roll out and the cancelling of the Keystone XL oil pipeline is adding pressure on CAD.  Some political concerns around a Scottish referendum or early Italian elections could also add pressure on EUR and GBP. The market is still very short USD and long EUR and GBP so the weak side is lower.

Looking at the potential of increased Covid restrictions, long USD and JPY against growth currencies are looking good. Short CADJPY below 82.20 and long USDCAD seem sensible.

Our overview and outlook of the key trading pairs and indices is as follows

EURUSD – The Euro is once again under pressure as the US stimulus deal might be delayed as President Biden is willing to renegotiate the terms of his stimulus package. However, despite the uncertainty, the downside remains limited for now as investors will be waiting on the side lines ahead of this week’s key events, such as tomorrow’s FOMC meeting and Thursday’s Q4 US GDP report. We flipped our bias to bearish on the single currency targeting the low 1.20s in the near-term, as long as risk appetite remains low.

GBPUSD – The Cable keeps breaking lower despite the UK Unemployment Rate beating estimates with 5% in November. Meanwhile, the safe-haven dollar is gaining ground and equity traders are worried that momentum is lost, amid concerns that President Joe Biden's stimulus plan is delayed. A break below this short-term trend line could open doors for further losses towards the 200-period SMA.

USDJPY – The dollar/ yen is still trading within the same tight range between 104 and 103.65 despite falling US Treasury yields. Weaker global risk sentiment keeps the Japanese Yen supported with technical indicators favouring a bearish direction on the daily chart, as the pair settles below the 50-Day SMA, with 103.65 and 103.30 as next key support levels.

FTSE 100 – The FTSE100 dropped slightly lower yesterday following on to a disappointing start of the week as threats of tighter restrictions appear to drive an element of uncertainty amongst investors. Earlier today, the unemployment rate in the UK came in at 5% up from 4.9% but beating the 5.1% consensus. Claimant count increased in December to 2.6 million, a monthly increase of 0.3%. Looking ahead, stocks in London remain subdued as level 5 lockdown measures are set to continue until at least early March with a meeting of the Cabinet set to take place today. Technically speaking, the FTSE is still trading in a downward channel below near-term moving averages on the hourly chart, but the daily timeframe shows key support at the 50-Day SMA around 6600 / 6580.

DOW JONES – The Dow Jones Industrial Average dipped more than 500 points yesterday before recovering significantly as investors expect Apple, Tesla, and other tech giants to report healthy earnings for the end of 2020 this week. Other Dow components scheduled to report this week include American Express, Johnson & Johnson, and 3M, giving investors an idea of how the last three months of 2020 fared, and whether the market rally will continue to sprint higher or not. The Federal Reserve will begin a two-day meeting on interest-rate policy today and the wide expectation is for it to keep the high gear on its stimulus for the economy and markets. The Dow index is not expected to move much ahead of the FOMC meeting with technical indicators favouring a downside move to the 30700 and 30625 support lines.

DAX 30 – In European stock markets, Germany’s DAX fell 1.7% yesterday after the German IFO business index dropped more than expected showing the impact of the second wave of the virus and corresponding restrictions. Looking ahead, we suspect European markets to continue to slide lower on a combination of concerns about another lockdown in France, the threat of tighter restrictions across Europe, as well as disruption to vaccine supply. Technically speaking, the previous DAX support line at 13700 has now turned resistance with a new support level and target at the 50-Day Moving Average around 13520.

GOLD – Gold failed a tat short from reaching our second resistance target at 1870 despite a drop in the US10Y as investors sought refuge in the greenback after the US stimulus package got delayed with Senate Majority Leader Schumer saying aid is unlikely before Mid-March. 1850 support level, coinciding with 200 period SMA is the line in the sand to direct today’s session as investors wait for reassurance from the Federal Reserve first policy meeting in 2021.

USOIL – WTI Crude shortly traded above the 200 period SMA on the hourly chart in early trade today only to head back south, printing back in the $52/$52.60 support/resistance range as US stimulus got pushed back, vaccines are getting delayed, amid an ongoing surge in Covid-19 cases and extended lockdowns are keeping a lid on higher energy prices. A failure to print an hourly close above $52.60 resistance will have WTI print lower with $52 as the closest support target.