European markets underwent a rather mixed session yesterday, with the FTSE 100 underperforming after it was announced that London and a good part of the south-east of England was being put into tier 3 restrictions at midnight tonight, due to a new strain of the coronavirus which was spreading at a faster rate.
This of course raises the very real concern that the vaccine might not be as effective, and while there is no evidence that it would be, the revelation of this new strain has added to the uncertainty in markets in the lead-up to Christmas. While disappointing, the rise in infections is not a UK phenomenon, and we’ve already seen Germany, France and the Netherlands extend their own harsher restrictions into next year, while at the same time being behind the curve in their own vaccination programmes, which haven’t even begun yet.
On the plus side, we did see a marked improvement in sentiment over a renewed sense of optimism that the UK and EU might be able to bridge the gap that currently exists between them on the key elements of the level playing field and fishing. With the Irish foreign minister, Simon Coveney, saying that a deal was 90% done, it would be absolutely extraordinary if the deal were to founder on the remaining 10%, but as with anything the devil is in the detail. As stated previously, the only deadline that matters now is 31 December, though ideally, we would hope to see something tangible before Christmas to allow time for ratification. After the year we’ve all had, amid the pain and heartache that the virus has wrought, wouldn’t it be nice if hostilities were suspended on the altar of not inflicting more economic pain on top of the economic pain of coronavirus, and a deal agreed in time for Christmas.
US markets finished the session on a similarly mixed note, with all eyes on Capitol Hill and a possible stimulus deal, against a similar backdrop of cold weather, rising post-thanksgiving infection rates, and fears over even tighter restrictions, as the US death toll rose above 300,000. In Asia, the mood is slightly less pessimistic, but still downbeat on the back of the resurgence of coronavirus cases worldwide. On the plus side, the Chinese economy has continued its solid rebound from its own Covid-19 crisis earlier this year, as well as the lack of a second wave there. The rise in cases along with the new strain looks set to translate into a slightly lower open here in Europe this morning.
Earlier today we got the latest Chinese retail sales for November, which have continued the resilience of the last three months. The lack of a second wave, as well as the Golden Week holiday and Singles Day, helped November retail sales rise 5%, the fourth successive monthly gain, putting the Chinese economy on course for a much better end to the year than would have been thought possible only a few months ago. The rebound in consumer activity was primarily driven by sales of communications sales equipment like mobile phones, which rose over 40%, as well as sales of motor vehicles which saw a rise of 11.8%. Despite the big improvement in consumer spending in recent months, Chinese retail sales still remain below the levels we saw at the end of last year, when they were at 8%, and they are still down 4.8% year-to-date. Industrial production also stayed resilient; it was already back at pre-pandemic levels at 6.9% in October, coming in at 7%, and the best levels since March 2019
Markets here in Europe look set to open slightly lower as we look ahead to a day of significant UK economic data. The upcoming tightening of restrictions across London and the south-east are another hammer blow to the ailing hospitality industry, with today's latest unemployment numbers set to be one of many sobering signposts of the economic damage caused by Covid-19 over the next few months. Even before yesterday’s announcement of tighter restrictions, the outlook for UK unemployment had started to look much bleaker in recent months, with some notable increases in the last three months or so. Since July we’ve seen a big jump from 4.1% to 4.8% in September, and this is likely to continue to rise for several months to come, with another jump to 5.1% for the three months to October expected in the next hour or so.
In the latest spending review, chancellor Rishi Sunak forecast that unemployment could well peak in the second quarter of 2021 at 7.5%, and to that end he said that he would put aside £3bn to deliver a new thtee-year restart programme for those longer-term unemployed, to try and get them back into work. While this is very welcome, along with the furlough scheme which has now been extended into March, it is likely to have come too late for a lot of people in vulnerable jobs, given that a lot of employers decided to make a start on reducing headcount when the November lockdown was announced. This could accelerate further in the coming months given yesterday’s tier 3 restrictions announcement.
Unless further help is forthcoming over the next couple of months, for some of these ordinarily solid businesses, we may find that when we finally come out of the other side of this dystopian nightmare that a good number of these businesses may well not be around for us to enjoy. In which case, we could get a further acceleration of the headline rate after Christmas and new year as the jobless rate continues to rise, vaccine or not. The monthly jobless claims total is already running at 7.3%, a level which is likely to more accurately reflect where the UK jobs market currently is at the moment, with the risk this is likely to edge back up again, with the numbers for November expected to tick higher, as a result of the tighter restrictions during last month, with more losses expected to come as we head into 2021.
EUR/USD – continues to struggle near the 1.2180 area, with wider resistance at 1.2230. Needs to stay above support at 1.2060/70 to maintain upward bias towards 1.2550. Only a move below 1.2020 negates the upside scenario
GBP/USD – ran out of steam at the 1.3445 area before slipping back but still above the 50-day MA and 1.3130 area. A break below 1.3100 opens up a move towards 1.2850. Need to get back above the 1.3450 area to stabilise and retarget the highs.
EUR/GBP – rebounded from the 0.9045 yesterday, however the air still looks thin above the 0.9200 area. A move to 0.9300 and the September peaks remains a possibility while above 0.8980.
USD/JPY – continues to trade in a fairly tight range with resistance at the 104.70 area, and while below the risk remains for a move back to the November lows at 103.18.