US futures are pointing to a slightly softer open on Friday, ending the week on a slightly negative note despite a massive stimulus proposal and reassuring comments from the Fed.
Joe Biden unveiled his $1.9 trillion stimulus plan on Thursday, a number more or less in line with what had been leaked as he sought to provide essential support in the next phase of the crisis.
With the details now out there including certain components that will seriously struggle to get Republican support, it now becomes a question of just how united Senate Republicans are and what, if any, changes will be necessary to get it through.
One question on investors minds has been what a stimulus package of this size will mean for interest rates and bond buying over the coming years, with yields rising in the aftermath of the Democrats’ victory in Georgia. Clearly the expectation has been that it will mean tightening will be necessary sooner but Fed officials have sought to play down these worries.
Fed Chair Jerome Powell joined the chorus of voices seeking to alleviate any concerns, stressing they were far from considering an exit from the extensive policy support they’ve provided. He also acknowledged the market sensitivity to their actions and words and was clear that when the time comes to communicate an exit, they will do so very clearly.
Those words will provide some reassurance to investors and yields have fallen slightly in response to them but the 10-year Treasury remains above 1% for now, so investors aren’t totally convinced. Any removal may not be planned any time soon, but that doesn’t mean the path of travel for rates hasn’t changed over the last month and that’s what the markets are suggesting.
UK adapting to lockdown life
The UK is adapting to lockdown life, as evidenced by November’s GDP release, which showed the economy contracting only 2.6%, compared to October, despite the country being back in full lockdown. This is encouraging given that the country is back in lockdown for at least another month and while the economy should suffer more under even tighter restrictions, with some industries harder hit than others, it won’t be nearly as bad as last April/May.
The data didn’t do the pound much good. A brief moment of reprieve was quickly reversed and the currency remains almost half a percentage point down on the day against a resurgent dollar, slightly less so against the euro. The pound has looked a little overstretched in the aftermath of the Brexit deal and may be seeing some profit taking.
JPM higher after earnings beat
JP Morgan got earnings season off to a solid start today, reporting earnings and revenue well ahead of analysts expectations, while also releasing $2.9 billion from previously set aside loan provisions, thanks to the latest Covid stimulus and vaccines developments. Trading and investment banking were two bright spots, with the environment last year being very beneficial, something we should see reflected in other reports in the coming days. These are very encouraging results, even if the shares are only a little higher in pre-market trading.
Oil pares gains
Oil prices are pulling back once again today, with WTI just below $53, off just over 1% on the day. We may be seeing a little profit taking in crude prices against the backdrop of a stronger dollar. They’ve been on a remarkable run in recent months but the dollar is enjoying a modest recovery which is likely to drag a little.
The outlook is still positive for crude, despite near-term risks to the economic outlook. OPEC+ has shown they’re more than up to the challenge of the pandemic and reaffirmed that last week, which is why prices remain buoyed and will likely be well supported. An interesting support level for WTI could be $50, should it pull back that far, not that there’s many signs it will at this stage.
USD keeps pressure on gold
The dollar rebound comes even as US yields ease off a little today, following Powell’s comments on Thursday. Interestingly, gold is showing some resilience, albeit from very low levels. It remains stuck in a range between $1,820 and $1,860, since plunging following the Georgia run-off.
If the dollar picks up any more steam, it could create near-term challenges for the yellow metal with major support levels not too far below. We could see some support around $1,800 should $1,820 fall, with $1,765 then being a major level below.
Bitcoin stumbles at $40,000
Bitcoin fell just short of $40,000 following its impressive rebound from its fall at the start of the week. It remains in a strong position despite pulling back once again, with the sell-off not generating any significant momentum yet, by bitcoins own standards.
Obviously, being a highly speculative instrument means that could change very quickly in either direction. A break above $40,000 could be the catalyst for another powerful rally, at with a new high opening the possibility of a rapid rise to $50,000. Downside risks are always present with bitcoin and while $35,000 may provide an interesting test, the only level that really matters is $30,000. A break of this could trigger a much sharper correction.