It was another uneventful day in the markets yesterday as fresh news stories were thin on the ground. The same old headlines about vaccines being distributed and optimism with respect to President Biden getting his $1.9 trillion stimulus plan approved in the next few weeks continued to be the main focus of traders’ attention.
Both topics are of major importance but neither is likely to see any serious progress anytime soon. “The fact that new variants of Covid-19 have emerged has caused a little concern in relation to tackling the crisis but AstraZeneca has already announced that it will develop unique drugs for the different strains,” remarked David Madden, market analyst at CMC Markets UK, this morning.
Last week it was announced that Democrats introduced a measure to try and implement President Biden’s $1.9 trillion spending plan without gaining backing from the opposition, the Republicans.
“It has been the overriding story of the week and it is likely to linger too as the process could take weeks. Global stocks have been helped by the possibility of additional spending, in particular, US equities. The S&P 500 finished slightly higher last night,” Madden pointed out.
Monetary policy is one of the two major tools that can be used to potentially trigger economic activity, he continued. On Wednesday, the Fed’s boss, Jerome Powell, re-stated his commitment to keeping a very loose policy in an effort to help steer the economy through the current situation. Powell confirmed that stimulus will not be withdrawn until the US economy is out of the woods.
“The central banker said the actual unemployment rate is, in reality, is closer to 10 per cent and that it is a long way from full employment. Traders took the update as a sign that policy will remain on hold for some time. That has underpinned stock markets,” Madden said.
Chinese New Year
Several stock markets in Asia are closed today as countries celebrate the Lunar New Year. Equities in Japan and Australia are in the red. The Australian state of Victoria will enter a five day lockdown in a bid to curb the spread of the coronavirus. Stock markets in Europe are set to open a little lower.
The US dollar has been in decline for the past week. “Its negative move began following the downbeat US non-farm payrolls report. Mr Powell’s remarks about maintaining the current monetary policy didn’t help,” Madden said.
Yesterday’s jobless claims reading was disappointing on two counts, firstly, the reading was 793,000, missing the 757,000 forecast, secondly, the prior update was revised up from 779,000 to 812,000. The jobs data backs up Powell’s stance with respect to keeping policy on hold, he noted.
The CMC GPB Index hit an 11 month high on Wednesday. Sterling benefitted from last week’s Bank of England meeting whereby it was suggested that negative interest rates will not be introduced in the few next months, or potentially at all.
“Even though the near-term outlook is bleak because of the lockdowns, the BoE is banking on a successful vaccine rollout to bring out a robust economic recovery later in the year,” Madden noted.
UK GDP numbers this morning
Today’s UK growth reading will be in focus as it might influence BoE policy. UK gross domestic product (GDP) contracted 9.9 per cent last year, marking the largest annual fall on record.
Data from the Office for National Statistics showed UK GDP grew one per cent in the fourth quarter of the year due to recovery in government consumption and business investment as Covid restrictions eased.
Services account for approximately 70 per cent of the UK’s economic output. The services PMI levels in October, November and December were 51.4, 47.6 and 49.4 respectively. A reading below 50.0 means negative growth.
“It is clear the tougher restrictions that were introduced from November onwards dented the all-important industry. Given the uncertainty that existed in relation to the UK-EU trading relationship at the back end of 2020, there could have been stockpiling of goods,” Madden said.
British bank’s lending margins are being squeezed by the low interest rate environment, so he said the BoE is unlikely to rush into cutting rates below zero.
“Even if today’s growth rate is negative, it doesn’t necessarily mean that sub-zero rates will be a done deal. Sterling has been elevated lately, so a not-hot reading could prompt a fall in the pound,” Madden concluded.