Stocks are higher again which means investors are continuing to ignore the deteriorating virus situation, as they did for most of 2020. As well as the huge stimulus measures supporting the markets, the recent development and now the rolling out of COVID vaccines means investors are looking forward to more normal times ahead and are overlooking short term risks posed by the latest lockdowns. In addition, the fact that a no deal Brexit has been avoided has further boosted the appetite for risk, which is why the FTSE has started the new year in a bullish mood and the pound has been able to hold its own relatively well in the face of another likely contraction in Q1 GDP due to the fresh national lockdown. That said, the latest support from the U.K. government is undoubtedly going to help offset some of the negative impact of the lockdowns. It is imperative that the government is now able to vaccinate as many people as possible, so that when the latest lockdown ends, things can go back to normal as quickly as possible.
Data not too bad
Meanwhile, the latest economic numbers released so far this week haven’t been too bad, even if the European services PMIs were all revised a touch lower this morning. This shouldn’t have come as surprise to anyone given what’s happened with the lockdowns. Indeed, the services sector is highly likely to suffer further in January and the upcoming ISM services PMI from the US on Thursday is likely to show a similar picture to Europe. But crucially, manufacturing has been a relatively brighter spot as Monday’s final European, Canadian and Japanese PMI readings showed. In fact, the US ISM manufacturing PMI, released on Tuesday, was quite strong at 60.7, reducing concerns that the world’s largest economy slowed down sharply again at the back end of last year. Meanwhile the focus is going to turn to the jobs market as key US employment numbers are set to be realised this week, starting with the ADP private sector payrolls report today and culminating in the release of the official non-farm payrolls report on Friday.
Central bank support here to stay
Regardless of the outcome of data releases over the coming weeks and months, investors know full well that central banks will ignore any short-term overshoots in employment and inflation. Monetary policy is going to remain loose for a while yet and even if central banks were to start tightening their belts, this won’t happen until at least the latter parts of the year and in any case will be limited.
So, with global monetary policy set to remain extraordinary loose for some time to come, and as we hopefully near the end of the pandemic, investor sentiment could remain positive towards risk assets for the foreseeable future. Granted, there will be hiccups along the way, but the general trend is likely to remain positive for stocks, especially value stocks – in particular in Europe, where equities have lagged behind their US counterparts.
DAX could be heading to new highs
Indeed, the German DAX looks set to resume its bullish trend after consolidating near its recent highs for a few days:
Source: ThinkMarkets and TradingView.com
The index created a doji candle on the daily chart yesterday and now it looks like it wants to break higher again. The path of least resistance this remains to the upside. As a result, it could rise to a new record high, possibly as early as later this afternoon. That said, we have to be prepared for all outcomes. As such, a break below the bullish trendline around 13460ish would invalidate this short-term outlook.