It has been another amazing week for cryptos, copper and the pound, mixed one for equities and crude oil, and bad week for gold. Consolidation was the name of the game for stock markets this week, with major indices easing off their record highs as investors wondered whether rising bond yields were a good thing (as they point to better economic conditions) or a bad thing (as they reduce the likelihood for further stimulus). In the end, the markets were undecided. But the rising yields did push gold lower, briefly touching its lowest level since July, before rebounding on Friday. Silver held its own well, finding support from growing expectations over firmer demand for industrial uses. For exactly this reason, copper continued its upsurge with another 4% rally on Friday to reach its best level since September 2011. With Dr Copper rising, this kept the ongoing reflation trade alive and commodity dollars found good support as we headed towards the end of the week. Crude oil eased back after weather-related disruptions in the US had pushed energy prices sharply higher. Also on the rise was the pound, which climbed above the $1.40 handle. Bitcoin surged to new records after breaking through the $50K barrier.
Top 3 factors to watch out for in the week ahead:
Will UK government announce relaxation of restrictions?
- Lockdowns to end soon? Will UK government announce relaxation of restrictions?
- Reflation trade – will we see the FTSE join the global rally?
- Bitcoin – what’s next for the digital currency after hitting $50K?
The pound has been surging higher on expectations of strong demand once lockdowns end, and with virus cases falling, PM Boris Johnson is likely to provide the road map for gradual easing of restrictions in March. The GBP/USD climbed above $1.40 in anticipation of this on Friday. Although retail sales disappointed badly, the markets are forward-looking and any softness in data during this lockdown are continuing to be shrugged off. The vaccine rollout in the UK has been quite successful so far, raising hopes that lockdowns will end for good soon, which, together with ongoing government support and favourable monetary conditions, will fuel a sharp economic recovery. This week’s stronger-than-expect inflation data also makes it less likely that the Bank of England will go down the route of negative interest rates, further boosting the pound. Let’s not forget that the UK also avoided a no-deal Brexit at the back end of last year, which is one of the key reasons the cable got to $1.40, a level where it was trading around before that 2016 referendum.
While a bit of profit-taking is warranted at these levels, I reckon the pound is likely to go further higher over time – possibly towards the $1.50s in a few months’ time, although this will depend to a great extent on how the UK economy will evolve and is subject to the virus situation. As things stand, though, things are looking up and there is finally light at the end of what has been a long tunnel.
Could the FTSE join the global rally?
The FTSE surged higher Monday before retreating for the rest of the week on profit-taking. Along with global indices, though, it found support on the last day of the week, suggesting the bullish momentum is still intact. Rallying copper prices provided support for the miners, while the rising bond yields helped banks. While the strength of the pound has held back the index, the fact that UK and global monetary conditions are going to remain loose and government spending high, the long-term outlook on the FTSE is positive. This is especially because the UK is miles ahead of the EU in the vaccine race with 16.8 million people having had their first shot. The UK also avoided a no-deal Brexit at the end of last year, which has reduced macro risks further. So, I think the UK index will be able to stage a rally. It will need to hold its breakout above THIS bull flag pattern and keep support to keep the buyers happy:
Source: ThinkMarkets and TradingView.com
Bitcoin continues to hit fresh records
Bitcoin broke above the $50,000 hurdle before continuing to push to new uncharted territories, almost touching $54,000 at the time of writing on Friday afternoon. Bitcoin remains fundamentally supported because of growing demand as major companies warm towards cryptocurrencies. So, even if prices were to correct themselves it is unlikely to be in the style of the late 2017 drop, when Bitcoin went on to lose more than 80% of its value by late 2018. Bitcoin has become a lot more stable and although it will dip here and there, it is unlikely to drop by similar amounts in percentage terms again.
But in so far as the short-term is concerned, Bitcoin dips back toward supports such as $52,550 could be defended in what has become a very strong bullish trend for the cryptocurrency. Below this level is that $50K handle, which needs to hold to keep the bullish momentum alive. If this level gives way, however, then at the very least I would a short-term correction towards mid-$40,000s.
At the time of writing, Bitcoin had even broken the upper resistance of its bullish channel, pointing to extreme bullish exuberance. In these conditions, anyone late in the game will need to proceed with extra case as the rug could be pulled any time if enough people start taking profit.
Still, the path of least resistance is still clearly to the upside. As such, I continue to favour buying the short-term dips than selling into the rally. There are no obvious technical levels to watch on the upside, except the big milestones like $55K, $60K etc.
Source: ThinkMarkets and TradingView.com
Data and earnings highlights
- German Ifo Business Climate
- UK Government to set out 'cautious and prudent' route out of lockdown
- New Zealand retail sales
- UK jobless claims and average earnings
- Fed Chair Jay Powell testimony and CB Consumer confidence
- Earnings: HSBC and IHG
- RBNZ policy decision – rates expected to be held at 0.25%
- US new home sales and crude inventories
- Earnings: Lloyds and Reckitt Benckiser
- US Preliminary GDP (second estimate) and unemployment claims
- Earnings: Anglo American, Standard Chartered and BAE Systems
- Japan data dump – retail sales, industrial production and CPI)
- Handful of second tier data e.g. French GDP, US personal spending and income
- Earnings: IAG, WPP and Rightmove