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Risk appetite remained buoyant last week despite poor US employment figures and some issues in the Pfizer supply chain. The main signals were USD weakness, strength in CAD (on stronger Crude Oil and a surprising Employment report) CHF and EUR. Markets are still pricing in more stimulus as well as a strong economic recovery as the vaccines get distributed in 2021.
Going into the new week, signals are stretched and caution is advised: 86% of stocks on the NYSE are trading above their 200DMA; USD short positioning is stretched; US lockdowns continue and there may be more short-term pain before the future gains.
This week, focus will be on the Brexit endgame and weekend news (at the time of writing) has not been encouraging; the EU fiscal debate (with Poland and Hungary blocking the 1.8 Trl package); the ECB meeting and US stimulus talks.
Themes for the Week
- Brexit: traders may have to dial back their optimism regarding an agreement, as the clock is ticking and the level playing field issues remain. No Deal is becoming more of a possibility by the day.
- EU/ECB: markets will focus on the EU fiscal debate (whether Hungary and Poland will continue to block relief efforts or not) and the ECB meeting (with the Euro at 2 ½ year highs, the risk is that Lagarde will do more than consensus).
- US Fiscal Talks: markets will pay attention to whether the US government shutdown is averted or not, and whether the 900 Bln bipartisan package will see the light.
- Vaccines: markets will remain sensitive to further positive (or negative) news on vaccines.
Data in the Week Ahead:
- Cad IVEY PMI à Expected to slow with the return of Covid
- GER ZEW à Might actually surprise as factory orders were higher recently.
- BOC Rates Decision à after stellar jobs data, consensus is for no change.
- ECB Decision à consensus is for further easing and lower economic projections.
- US CPI à Possibly higher as petrol prices increased recently.
- US Jobless Claims
- BOE FSR and FPC Meeting Minutes
- UoM Consumer Confidence à Rise in Covid-19 cases likely to dampen sentiment.
Correlation Report:
Comment: Correlation tables are still highlighting high correlation amongst equity markets, bonds and USD. This is typical when the markets are focusing on risk on/off themes and USD dynamics.
On the Radar:
As of Friday’s close, the strength-weakness relationships in FX show continued weakness in USD and JPY vs. strength in CAD most of all. EUR remains strong but further upside may be limited ahead of the ECB meeting. GBP will also be in play, swayed by Brexit developments. SP500 remains a leader in the equity space.