Europe set to open slightly higher, as US fiscal talks get underway

While US markets continued to set new records last week, European markets traded in a more lacklustre fashion as the early year optimism of the first week of 2021, gave way to a lot more caution, as a rise in short-term economic pessimism, and the prospect of tighter lockdown restrictions for longer, raises the prospect of longer-term economic damage.

These concerns, along with the prospect that EU leaders might look to consider internal border closures due to rising infection and death rates, has seen investors in Europe become a lot more cautious, especially given that countries in Europe have been much slower in coordinating a speedy vaccine rollout.  

Friday’s flash PMI’s laid bare the further economic damage caused by the various lockdown measures in France, Germany and the UK, with the UK the hardest hit, as services fell to their lowest level since May last year, coming in at 38.8. The numbers probably weren’t helped by border disruption at the Channel ports in the wake of the last-minute trade deal agreed between the UK and EU on Christmas Eve.   

Whatever mistakes the UK government has made with respect to the pandemic, and there have been many, the vaccine rollout continues to go from strength to strength, with almost 7m people getting their first jab, as the number count continued to rise over the weekend.

This outperformance on the vaccine front may go some way to explaining why the pound has managed to hold up fairly well so far this year, despite the deterioration in the most recent economic data, which is to be expected given the tighter restrictions.

There has been chatter in recent days that the Chancellor of the Exchequer might be considering some tax rises in his March budget, as the battle between the fiscal hawks and doves in the Treasury continues to play out.

The reality is any tax rises at this stage of the crisis would be foolhardy in the extreme, and it is hard to imagine any serious politician would even contemplate such measures at this time. The airing of these discussions could merely be a mechanism to create some form of differentiation, at a time when the prospect of more fiscal stimulus measures in the short term, is the more likely outcome.

The outperformance of US markets last week has been all the more remarkable given that it has been led by the large cap tech stocks, which could well be the most vulnerable to a regulatory crackdown on the part of the new Biden administration, as it starts to get down to the business of the matters at hand.

The next two weeks are likely to be a key bellwether for that sector as most come forward with their latest earnings announcements for the Thanksgiving and pre-Christmas period, starting with Microsoft, Apple and Facebook this week.

There are also some concerns that the euphoria seen in the aftermath of the announcement of the new $1.9trn stimulus package might well give way to the reality that we may not see anywhere near that amount. Rumblings are already being heard from both sides of the political aisle that could see the final amount cut by almost half to around $1trn, as some Republicans push back on certain aspects of the deal.

With the Federal Reserve also meeting this week it will be incumbent on the FOMC and Fed chair Jerome Powell to act as a bridge for markets with the Fed’s $120bn a month asset purchase program, if bipartisan bickering holds up some elements of any new fiscal deal, which is starting look increasingly likely.

European markets look set to open the week slightly higher, with the only items of note today being the latest German IFO Business Survey for January and two speeches from ECB President Christine Lagarde, both of which are likely to reiterate her comments last week at the post meeting press conference, which turned out to be somewhat of a snooze fest.

EUR/USD – after the low of last week the euro has continued to find support at the 50-day MA. While above here the euro needs to overcome the 1.2230 area to kick back towards the highs this month at 1.2350. A move below 1.2040 could well signal further losses towards the 1.1980 area, and possibly lower towards 1.1800.  

GBP/USD – ran into a wall at 1.3745 last week before sliding back towards 1.3500, however the 1.4000 scenario remains intact while above 1.3400. A fall below last week’s low at 1.3450 could well signal further weakness, but only a move below 1.3400 would argue a move towards 1.3200.

EUR/GBP – last week’s rebound from the 0.8830 area has prompted a short squeeze towards 0.8920, however while below the 0.8930 area, the risk remains for further losses towards 0.8780.

USD/JPY – downside risk towards 102.60 remains intact while below downtrend as well as cloud resistance at 104.30 This area is a key barrier to further gains towards 105.20.

FTSE100 is expected to open 15 points higher at 6,710.

DAX is expected to open 36 points higher at 13,910.

CAC40 is expected to open 7 points higher at 5,566.