Asian shares found comfort just below record highs on Friday with trading volumes low as markets in the region were closed for the Lunar Year holiday. The S&P 500 and Nasdaq eked out modest gains on Thursday, just shy of record highs amid the risk-on mood. In Europe, futures are flat as mixed economic data from the US encouraged investors to adopt a guarded approach after another phenomenal week for global stocks.
There is no doubt that riskier assets are following the path of least resistance and moving higher amid increasing vaccinations against Covid-19, hopes for further U.S stimulus and loose monetary policy from central banks. Given how the Fed’s punchbowl remains full with the music blasting in the background, equity bulls are inspired to drive markets higher. However, after the binging on government spending and cheap money from central banks, a nasty hangover called inflation lurks in the shadows.
Although Powell recently dampened inflation expectations by saying any rise would be temporary, this will most likely remain a key theme that influences market sentiment this year. When considering how rapidly rising inflation could hurt equity returns and force central banks to start tightening, it seems likely that the party in stock markets could then be at risk.
Pound sulks after GDP data
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UK GDP was released earlier this morning and the good news is that the UK economy avoided a double-dip recession by expanding 1% in the final three months of 2020. But the bad news is output shrank 9.9% in 2020, its worst annual slump on record. It’s safe to say that 2020 was an incredibly challenging year for the UK economy as the coronavirus menace spread its poisonous tentacles across key sectors and triggered national lockdowns. Although that is now history, some of the key themes impacting the UK economy are likely to rollover into this year. On the bright side, the UK economy has hit the ground running with the vaccine rollout opening the door to looser restrictions. Should economic data improve over the next few weeks, this may boost sentiment towards the UK economy and pound.
Speaking of the currency, prices have slipped towards 1.3790 this morning. However, bulls remain in the driving seat, especially after the Bank of England adopted a more hawkish stance during its last monetary policy meeting. A technical pullback could be on the cards for GBPUSD before the bulls try their luck with 1.3850.
Commodity spotlight – Gold
Gold seems to be unable to make its mind up as prices bounce around within a range on the daily timeframe.
It is becoming clear that the absence of a fresh directional catalyst to inspire bulls or bears has forced the metal to trade sideways over the past few weeks. What is even more interesting is how prices will behave around the sticky $1850 level which has turned into resistance this week. While an appreciating dollar could drag prices lower in the near term, a fresh catalyst may be needed to jolt prices out of the current range.
Looking at the technical picture, a breakdown below $1820 could open the doors back towards $1800.
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