Daily Wrap Up 02 February 2022

2 Feb 2022 04:08 PM

Europe rallies, shock ADP dampens US market

European stock markets are set to finish higher again as the upbeat mood continues. Indices have been gaining ground this week as traders are in recovery mode. The DAX and the FTSE 100 hit two-week highs as worries about a potential conflict in Eastern Europe have diminished, even though the political atmosphere remains tense. US index futures were showing solid gains a few hours ago, but the S&P 500 is now only up 0.2% as the latest employment data dented sentiment a little.

The US ADP employment reading caught traders by surprise as it showed that 301,000 jobs were lost last month, while the forecast was for 184,000 jobs to have been added. It was the worst reading since May 2020. The report was a reminder that the figure can be negative as well as positive. As the saying goes, “one swallow doesn’t make a spring” and by the same token, one poor ADP reading doesn’t mean the recovery is over. It is possible “the great resignation” is behind the explanation rather than employers cutting jobs.

Headline CPI in the eurozone ticked up from 5% to 5.1%, a new record high, and that caught economists by surprise seeing as the consensus estimate was for it to fall to 4.4%. By contrast, the core CPI figure slipped to 2.3% from 2.6%. The fact that top line inflation is still rising while underlying demand is falling puts the European Central Bank (ECB) in a difficult position as some central bankers would not like to lift rates as the economy is moving down a gear. Tomorrow, the ECB will announce its interest rate decision, and no change is expected, but the commentary will be in focus. This week it was confirmed the eurozone only expended by 0.3% in the last quarter of 2021, which was a big decline from the 2.2% growth seen in the preceding quarter. Today’s core CPI figure points to cooling demand, so that might dampen chatter about a potential rate hike from the ECB in the months ahead. EUR/USD is up 0.25% thanks to the slide in the US dollar.

Gold is back above the $1,800 mark as the inverse relationship with the US dollar is helping the asset. Earlier today, gold was moving lower but the accelerated fall in the greenback following the ADP report pushed up the metal. OPEC+ didn’t rock the boat with regards to policy as it announced plans to lift production by 400,000 barrels per day from March. The global economy is recovering and the group of oil producing nations is in no great rush to return to pre-pandemic levels of output.

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