Following Tuesday’s rebound in the reflation trade, there has been further follow-through in risk buying this morning. At the time of writing, we are once again seeing higher prices for crude oil, copper, gold, silver and US index futures. European stock indices were mixed on the session, despite the firmer US futures and the fact the top shares index in Hong Kong hit a fresh multi-month high overnight. In FX, the US dollar was down against all her major rivals and the pound was showing relative strength today. Investors were looking forward to rate decisions from the Bank of Canada and Central Bank of Brazil, as well as Joe Biden’s inauguration and more corporate earnings results from Wall Street.
Precious metals shining again
Both gold and silver were up for the third consecutive day. Precious metals were supported above all by a weaker US dollar. Investors are also expecting the ECB to signal its intention at its policy meeting this week to keep the current expansive monetary policy stance for a long time to come to support the Eurozone recovery. This should help to keep a floor under government bond prices after yields had recently started to break higher amid speculation that some central banks may soon taper their QE purchases.
Stocks on the rise
After a weaker start, European indices turned positive, racking US index futures. There was nothing new to trigger the risk-on response this morning. Investors appear happy to keep buying the dip, with a greater focus on value stocks. They are betting that, with the roll out of COVID vaccines and coupled with ongoing central bank and government support, the global economy will expand this year. President-elect Joe Biden, who will start his premiership in Washington today, has already unveiled a $1.9 trillion stimulus package plan which should help to fuel the recovery if passed. With Yellen being the ex-Fed Chairwoman, there will be greater co-operation between the central bank and the Treasury in the next few years. This should mean both monetary and fiscal policies will be closely aligned to support the US economy, providing a good backdrop for equities and other risk assets.
Adding to the positive sentiment, Netflix jumped 12% in after-hours trading last night after it reported new subscriber additions that exceeded Wall Street estimates. We also heard from Goldman Sachs and Bank of America yesterday. The former posted its highest quarterly profit in more than a decade, and although the latter also posted a quarterly profit that exceeded analysts’ expectations, its revenue fell short.
Pound climbs towards 2020 high
The pound was showing further strength this morning, with the EUR/GBP dropping below the key 0.8865 level and the GBP/USD climbing towards its 2020 high. Investors are hoping that the UK’s relative success in rolling out the COVID vaccines earlier than other countries would kick-start the COVID-hit economy, especially as a no-deal Brexit was avoided after all those years of uncertainty. In another dose of good news, a study has found that the Pfizer/BioNTech shot appears to be effective against the UK Covid variant.
Among other things today, we will have more corporate earnings including Morgan Stanley, Joe Biden’s Presidential Inauguration and policy decisions from central banks in Brazil and Canada. On Thursday, we will hear from the Bank of Japan and the European Central Bank. Friday will see the release of Eurozone PMIs and retail sales data from the UK and Canada.