Markets adopt a ‘buy-the-dips’ strategy

Yesterday's trading session was just a taste of what the future holds as investors struggled to make sense of the new Covid-19 mutations. Further volatility spikes and jitters can be expected as everyone comes to terms with this new threat, and until we have wide distribution of the vaccine the only answer is still stimulus. 

So, it is good news that the US stimulus bill was passed overnight in the Senate is now heading to the White House to be signed and put into law. A $900B relief package (the second biggest in US history) combined with a $1.4trn in regular government funding along with tax breaks for businesses, and a stopgap funding bill (effective till December 28th).  This was more than enough to translate into a "Buy the Dips" strategy, as global equities retraced yesterday’s Covid-19 mutant induced losses, and momentum continues to build in early trading.

The European Commission said on Monday it decided to approve the COVID-19 vaccine developed by Pfizer and BioNTech, as German Health Minister Jens Spahn announced the vaccination programme would start in his country on 27 December.

News of US warships entering Chinese waters and warnings from the latter seem to have, so far, had almost no impact on investors. Even safe haven assets like gold fell back as traders seem to have become unconcerned with non-Covid related news. 

The US Dollar remains under pressure across the board as the distribution of the Pfizer vaccine will begin before the end of the year. The GBP was on track to have one of its worst day since March, before making a comeback after PM Boris Johnson had made another offer to secure a Brexit deal.

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

EURUSD – The Euro bulls bought the dips yesterday as expected, despite fears over the new Covid-19 strain. Last night, the US Congress finally passed the $900 billion coronavirus relief bill with the Senate approving it. However, the passing of the bill was widely expected and had little market impact. We remain bullish on the pair in the near-term, amid the recent vaccine optimism, looking for a rally towards 1.23 if equities pick up steam.

GBPUSD – The Pound dropped around 300 pips yesterday amid the ongoing Brexit deadlock and the new COVID strain concerns. However, traders remain hopeful about a last-minute Brexit deal, which pushed them to buy the dips yesterday and recover most of the intraday losses. We remain bullish on the Sterling in the short-term, possibly retesting 1.35 today and beyond, as investors await further Brexit updates.

USDJPY – The dollar/yen attempted to break above the 50-SMA after huge USD demand as investors ran to safety. However, that rush was short-lived, as equities were able to trim its losses as US policymakers vote on the much-awaited stimulus, and the new strain of Covid be cured with the current vaccine enrolment. Today, we might see the pair attempting to retest the 50-SMA as we await clearer direction.

FTSE 100 – The FTSE 100 confirmed a third daily close in the red as the new Covid-19 strain discovered in the UK rattled global equity markets while nonetheless ruining many Londoners’ holiday plans. On the upside, Prime Minister Johnson is still going strong hoping for an “11th hour” Brexit deal as he offered France some concessions on trading routes, in expectation that the EU compromises in other areas. 6400 key resistance level to breach in today’s to open the door to further upside.

DOW JONES – The Dow hit a low at 29420 as we signalled for a short entry at 30235 and sentiment got hit by the latest Covid news, only for the index to make its way back to 30235 as investors decided to set their eyes on a profitable 2021 with the US in full on stimulus mode, passing a 7 day stopgap funding bill along with the second biggest relief package in U.S. history ($900B) which got bundled with a $1.4T in regular government funding and a side of tax breaks for businesses. Technically, an hourly close above 30120 (coinciding with 200 period SMA) will favour further upside with 30235 as closest resistance target.

DAX 30 – The Dax-30 shed 2% in yesterday’s session as we were short positioned, pushed and pulled by Covid mutations, thinner trading ahead the holiday season, and positive developments over U.S. stimulus. Bearish momentum seemed to have somewhat stalled after EU gave conditional marketing authorization to Pfizer-BioNTech’s vaccine and Gfk Consumer Confidence Survey released early today beat expectations, with 13200 key support level to break for further downside, while a breach above 13300 resistance level will favour a run towards 13370.

GOLD – The yellow metal traded a 50 point range between low and high in yesterday’s session, to close slightly in the red in a highly volatile day as the dollar index made a run towards 91 in a risk off mood as global equities turned south, before retreating towards 90, only to print higher in early trade today, confirming ongoing risk off sentiment. An hourly close below 1870 support level will open the door to further downside with 1860 as the next support target.

USOIL – WTI Crude printed a low at $46.23 pbl in yesterday’s session, hitting our short support targets on its way, as the new Coronavirus strain and the resulting tighter restrictions on travel increased investor fears of a speedy recovery, while statements out of Russia favouring an increase in oil production by 500,000bpd also added downside pressure. A breach of $46.50 support level will favour further downside with $46 as next support target, ahead of today’s API weekly crude inventories.