Virtual davos starts with no end to COVID restrictions

As we start the week, we maintain our view that we are going to see more global lockdowns which will lead to an increase in risk aversion.  Friday’s moves were just the beginning.  Global leaders are slowly coming round to the idea that relying on vaccines is not enough to eradicate the virus.  Border restrictions are likely to tighten especially as we have seen new outbreaks in China and even a case in New Zealand!

Davos, the forum designed to provide insights into the world’s economy, is forced online as leaders face the facts that the pandemic is still in control.

UK data is starting to show the impact of tight lockdowns there. Retail Sales were weak at 0.4% MoM vs 1% exp and Services PMI was very weak at 38.8 vs 45.0 exp. UK employment data tomorrow.

Weakness in European PMI’s was also focused on Services whilst Manufacturing stays strong. Eurozone Services PMI 45.0 whilst Manufacturing PMI 54.7.  However, the US PMI’s were surprisingly strong Manufacturing at 59.1 and Services at 57.5.

FOMC decision Wednesday. Markets will be focusing on any wording around the possibility of tapering towards the end of this year.  The US Q4 GDP figure could also impact oil and gold, especially if it is a miss.

The UK is still outperforming in terms of distributing vaccines. Although UK Health Minister Hancock is concerned that the vaccine may be less effective against some variants, South African studies have already shown that this is a possibility. As a result, the UK is looking to keep local restrictions tight but to also tighten border controls by implementing an Australia style quarantine for all arrivals.

China’s outbreak is worsening with 117 locally transmitted cases reported on the mainland. 67 in Jilin, 35 in Heilongjiang, 11 in Hubei, 3 in Beijing and 1 in Shanghai. Expecting restrictions to tighten to control the outbreak.

Long USD and JPY against growth currencies are the best way to express this view.  Short CADJPY below 82.20 and long USDCAD make sense. A slow vaccine rollout and the cancelling of the Keystone XL oil pipeline adding pressure on CAD.

Australia CPI on Wednesday morning will be important for markets trying to gauge whether the RBA will continue its QE program past its April deadline.

Patience is required with long GBP trade as in the short-term risk off moves could lead to a further pull back. Especially after EURGBP failed to gather momentum lower on the break of 0.8863 last week. Wait for 0.8950-0.9000 to fade EURGBP.

Protests in Russia demanding the release of jailed opposition leader Alexey Navalny are putting some pressure on RUB to start the week.

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

EURUSD – The Euro is on the rise this Monday morning as US stimulus hopes remain the main driver of this market, ahead of the German IFO due later today with a big beat on expectations to strengthen the bid tone around the single currency, lifting the pair above 1.22. Apart from the German IFO, a speech by ECB's President Christine Lagarde will also keep the EUR/USD pair volatile.

GBPUSD – The Cable broke back above 1.37, thanks to the massive US fiscal stimulus hopes and Fed’s non-stop bond-buying scheme. The UK's vaccination campaign and the drop in Covid-19 cases are also supporting the Sterling. The bulls will need to break above 1.3750 to open doors for further bullish momentum towards 1.38, keeping in mind that the BOE Governor Bailey is set to speak later during the day.

USDJPY – The Dollar/Yen is still trading within a tight range around the ¥104 level despite falling US Treasury yields with technical indicators favouring a bearish direction on the daily chart, as the pair settles below the 50-Day SMA, with 103.60 and 103.35 as next key support levels.

FTSE 100 – The FTSE100 hit our downside target at 6650 before rallying back slightly at the close after Boohoo announced that it would acquire the Debenhams brand in a transaction worth £50 million. Boohoo will then close the chain’s 124 shops keeping only its online presence. Which means that more than 10,000 employees who work for the 242-year-old retailer will likely loose their jobs. Looking ahead, we believe the market will remain weak today as UK PM Boris Johnson warned that stricter measures could be required to stop new variants from South Africa and Brazil entering the UK following the decision to suspend all the government's travel corridors. A retest and possibly a breach of the 6650-support line is highly likely.

DOW JONES – Markets have been mostly rallying recently on hopes that COVID-19 vaccines will lead to a powerful economic recovery later this year and also on stimulus hopes despite economic reports showing weakness in the job market and falling confidence among shoppers. Moreover, another series of company earnings on Friday, most of them beating Wall Street estimates helped push the Dow Jones index back above the 200-period SMA to 31100. Today, we suspect that the index will remain in the current range since there’s not much going on. The key support and resistance levels to watch are 31000 and 31225.

DAX 30 – The German DAX attempted to breach the 13800-support line on Friday before rallying back as US equities rose on stimulus hopes helping lift their European counterparts back higher. Today, stocks in Frankfurt at set to open higher despite the government’s downwardly revised forecast for economic growth in 2021, but the key level at 14000 remains the level to watch in case there is potential for any big move ahead of the German Ifo business survey due at 0900 GMT.

GOLD – Gold hit our short support target at 1850 on Friday, dipping below the 200-period SMA on the hourly chart, only to pick back up as investors continue to weigh surging Covid-19 cases and stricter lockdowns with France the next in line to go into another shutdown within days. All eyes remain on the Fed’s two-day policy meeting - ending Wednesday - as investors look for reassurances of continued support in the form of $120B monthly bond purchases.

USOIL – WTI Crude hit our short support target at $52 and $51.60 during Friday’s session only to recap losses after better-than-expected Markit Manufacturing and Services PMI data out of the US lifted sentiment. Fears of further lockdowns should keep the black gold under pressure while production outages from Libya and Kazakhstan, a weaker greenback, and an Iraqi plan to cut output in January and February to make up for breaching its OPEC+ quota last year, have kept prices supported, as we print between 52/52.60 support/resistance levels.