Written by: Craig Erlam | OANDA Europe
It's not just the US that's in holiday mode, it seems, with financial markets a little flat on Thursday.
Thanksgiving has naturally left a massive void in the markets and conditions aren't likely to dramatically improve until next week, with many surely making the most of it and enjoying an extended bank holiday weekend. There isn't exactly an abundance of event risk elsewhere to drown out the US celebrations so perhaps we should just enjoy the peace ahead of a potentially eventful end to a tumultuous 2020.
European stock markets are making small losses on the day. Some profit taking may be kicking in after a remarkable run this month, as vaccine fever gripped the markets and the great rotation saw previously unpopular companies come back into favour.
In reality, trying to read too much into trading today and tomorrow may just be a bit pointless, unless we see some much bigger moves. Even then, in light trade moves can be exaggerated so it's not worth getting too carried away unless something fundamentally changes.
Even the economic calendar today has nothing to offer into the end of the week with just a small selection of low impact data. The only noteworthy release this morning was the German GfK consumer climate, which fell to -6.7, a little more than expected but far from the low of -22.7 in the first lockdown.
There was nothing in today's ECB accounts to suggest expectations of more easing in two weeks is wide of the mark. In fact, when you consider the deteriorating economic outlook evident in the surveys, national lockdowns and references to inflation likely being in negative territory for longer than envisaged in the September projections, it's surely just a matter of how much easing is needed, not whether it is.
People in the UK have today learned just how much freedom they're going to enjoy in the run up to Christmas, as per the governments update tiering system. For most of the country, it seems, the answer is simply not much, regardless of whether you're in tier two or three, which is where the majority of us find ourselves.
Regardless of the various schemes in place to support businesses and employment, this is going to take a significant toll and explains the government's downbeat projections for growth and employment in 2021.
This makes the Brexit negotiations all the more important, as noted by the Governor of the Bank of England who recently warned that no deal would be worse for the economy longer term than the pandemic. No news is surely good news, given the four years of public berating that preceded the intense negotiations this month. But time is fast running out, the eleventh hour is almost upon us. It's time for compromise.
While sterling is a little softer, it continues to trade around the highs of the last two and a half years, highlighting the confidence in the markets that a deal will be reached, despite the end of the transition creeping ever closer. That could make for a savage sell-off if this confidence isn't rewarded.
Profit taking kicks in for oil
It's been some month for oil, with three vaccines and various assurances from OPEC+ triggering a 35% rebound just as prices were getting into dangerous territory. It seems some profit taking is finally kicking in today as we ease into the end of the week. With WTI holding above $45 and Brent having touched $49, it seems crude is through the worst of its post-summer troubles.
Of course, should the winter surge of Covid-19 surpass even the more pessimistic expectations, which is highly plausible as families gather during the festive period, the near-term outlook may deteriorate.
And then we have the planned production increases in January. Will producers be as keen to postpone or reduce these as they were a month ago or will they roll the dice? The bigger players are not averse to a gamble. I mean, they embarked on a price war early in the pandemic, in what turned out to be a horrific miscalculation on their part. Will they play it safe this time around?
Gold under severe pressure
Gold is hanging on in there around $1,800 but the yellow metal isn't exactly seeing much in the way of a corrective move, despite having fallen more than 8% since the first vaccine announcement. This doesn't bode well for the near-term outlook for gold, with the next support area below falling around $1,750-1,760.
With gold appearing to have broken its association with risk markets after being well aligned for much of the year, the end of the year will be extremely interesting. Higher US yields are clearly holding it back but there remains a strong argument for a bullish gold outlook, particularly early next year. I guess we'll soon see just how much appetite there is for discounted gold heading into the festive period.
The plunging elevator of bitcoin
Bitcoin giving us a timely reminder of the two way risk that comes with volatile cryptocurrencies. And while the old saying goes that markets tend to take the stairs up and the elevator down, with cryptos those stairs are steep and the elevator plunges. Bitcoin is down a modest 8% today, having recovered from earlier declines closer to 14% and more than 16% from yesterday's peak which was just shy of all time highs. This is likely the catalyst behind some profit taking.
Having wiped out 9 days worth of gains in only 6 hours, bitcoin bulls sniffed a bargain. Crypto trading is a high risk sport, one speculators in the space will be more than used to by now. And while I wouldn't be surprised to see another plunge in the price, I equally wouldn't be remotely shocked to see record highs in tomorrow's headlines. Bitcoin is back and as volatile as ever. And it's only just getting going.