Markets turn bearish as risk and equity asset allocations drop and concerns rise

We start the week with a bearish tone.Risk and equities were supported in the first two weeks of the year as investors allocated 2021 assets, but the continued pressures of Covid and the inconsistent global roll-out of vaccines is now leading to investor caution.

US markets are closed for Martin Luther King Jr Day so some traders will have an extra day to evaluate the impressive Chinese Q4 GDP data which came in at +6.5% back at pre-pandemic levels. Although the full year figure was 2.3% the lowest number in 4 decades. Industrial growth was very strong (+7.1%) but flagged the relative weakness in retail sales (+4.6%).

Thsu week we will be watching the different Central Bank meetings.At the BoC on Wednesday, there is the possibility they could cut rates by 10bps to 0.15% from 0.25% although there is almost nothing priced.  The last employment print was weak with unemployment ticking up to 8.6% although recent PMI’s and Business Outlook figures have been strong.

BoJ and ECB on Thursday no changes expected from either and we have the US 20yr Treasury auction Wednesday. Given the recent focus on US yields these auctions have been market moving.

In the UK CPI data is out of Wednesday, and if this is weak it could reignite negative interest rate debate and bring focus on the BoE meeting on the 4th February.

US Retail Sales were weak on Friday and the market focus has shifted to the deteriorating virus situation globally and the disappointing speed that vaccines are getting rolled out. In the short-term lockdowns are set to get stricter across most of the world which is weighing on risk sentiment that had reached elevated levels.

So, we expect to see risk off moves to continue this week, with oil likely to under pressure from reduced travel.We are also looking for risk off to drive USD bid so wait for a dip to 1.2000 in EURUSD to fade this move. Concerns around Italian politics and stricter lockdowns in Europe likely to continue to weigh on EUR in the short term.

GBP is struggling with the risk off and USD bid. GBPUSD tends to move with a higher beta that EURUSD in risk off, USD bid environments so expecting EURGBP to rally from here after failing to break below the 0.8863 level we have noted.

Look to fade rallies to 0.8950 leaving room to add at 0.9000, however we are still expecting UK to outperform EU given the speed of the vaccine roll out in UK but in the short term the risk off could lead to GBP position reduction.

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

EURUSD – The US dollar remains well supported despite the upbeat Chinese GDP and President-elect Biden’s new US stimulus package. The single currency bulls found support at the 1.2065 level for now, however risk sentiment remains cautious around the equity market, which could open doors for further weakness towards 1.20 if the recent support is taken out. Meanwhile, if the US Treasury yields keep pulling back, we believe the Euro will regain ground and recover higher towards 1.2130.

GBPUSD – The pound lost the 1.36 support despite the accelerated UK vaccine campaign. Last week’s US Treasury yields recovery is still impacting negatively on the market’s risk sentiment, shrugging off today’s better-than-expected Chinese GDP report. However, if bond yields continue to head lower during this upcoming week, then the Pound bulls might regain confidence and push the pair back above 1.36.

USDJPY – The dollar/ yen remains in a neutral territory as price keeps trading between 103.60 and 104. The pair started to rally higher after last week’s yield surge, renewing dollar’s demand. However, if yields top out and start to reverse, then the pair might also reverse.  This week all eyes will remain on the US 10-year yields, as it is the current market driver.  We need to see a break above 104 and 104.30 to confirm a bullish breakout.

FTSE 100 – The FTSE 100 hit both our support targets at 6750 and 6700 on Friday, weighed down by lower oil prices, financials, and a hit to US consumer sentiment as reported by the University of Michigan. A surge in number of infections with the UK not ruling out Quarantine Hotels and GPS to fight the virus should continue to weigh on market sentiment with the index now trading below the 20,50,200 period SMA with 6700,6670 and 6620 as closest support targets.

DOW JONES – The Dow Jones ended Friday’s session on a second daily consecutive close in the red, printing a low at 30630 - with our short support target at 30625 - after risk on sentiment took a hit from weak economic data and US national guards deployed to protect all 50 capitols ahead of Biden’s inauguration day. 30625 remains in focus with 30520 as next support target as US celebrates Martin Luther King Holiday. 

DAX 30 – European equities and the Dax ended Friday’s session on the backside, as tighter restrictions continue to weigh down on recovery prospects with France the latest to strengthen its border controls (starting today) while Germany yet to decide on a nationwide lockdown. Fewer than expected doses delivered to the EU (to around one third of the 27 countries) have also dented market sentiment with technicals favouring further downside, with a failure to retrace towards 13800 resistance level to confirm strong bearish momentum.

GOLD – The yellow metal ended Friday’s session below the 200 period SMA on the daily chart on the back of a stronger greenback as investors moved to ditch the idea of a swift re-opening with tighter restrictions for longer looking more likely as the base scenario. Weaker US retail sales with 7 out of 13 major retail categories posting a decline added to dollar strength, pushing gold below all moving averages on 1H/4H/D timeframe with 1800 as furthest major support level on the downside while 1840 (coinciding with 50 period SMA) to offer resistance on the upside.

USOIL – WTI Crude ended Friday’s session almost 3% lower, hitting our support targets at $52.60 and $52, weighed down by Covid-19 infections with China ramping lockdown measures as global deaths topped 2M. Energy prices also got hit by an EIA report showing jet fuel exports falling to lowest since August as diesel stockpiles swelled, in a sign of faltering global fuel demand. Low volume trading could exacerbate downside momentum with 200 period SMA and $51.60 as closest support targets.