European markets had a disappointing start to the week, dropping sharply yesterday on increasing concerns over the spread of Omicron, and government’s reaction to rising cases, with little in the way of Christmas cheer for those looking for further gains into year end.
It’s also worth considering that some of the volatility is being exacerbated by the absence of a lot of market participants as they finish early before picking up the baton again early next year. This may help explain why yesterday’s sharp moves lower weren’t matched by a move higher in gold prices, which would normally be the case in a risk-off move.
US markets also fell sharply after Democrat senator Joe Manchin said he couldn’t support the President’s new $1.9trn build back better infrastructure bill, raising the prospect that US GDP could be substantially lower in 2022 as key projects get postponed or pared back. Against a backdrop of concerns about rising inflation and less accommodative central banks, we saw big drops across the board but in particular in some of the more highly valued areas of the market.
Crude oil prices also fell back yesterday over concerns that tighter restrictions will prompt a sharp drop in demand. These falls saw Brent hit its lowest level in two weeks, down over 4% at one point before prices recovered to close lower by 2%. This morning prices are now higher by around 1%.
Today’s European market open isn’t expected to see any follow-through to yesterday’s decline and in a sign of how fickle sentiment is, we’re expecting to see a positive open, as the continued ebb and flow of flaky sentiment continues for another day. While concerns around Omicron remains very real the prospect of new restrictions being implemented this side of Christmas has receded somewhat, after the UK cabinet decided to wait for more data on hospitalisations and deaths. This delay has inevitably led to criticism from some quarters, however its hard to see what a new lockdown would achieve at this point given that most people have become a lot more cautious less they contract the virus in any case.
On the data front the UK economy remains in focus as we get a look at the latest public sector finance numbers for November.
Despite the end of the furlough in September, public sector borrowing has continued to remain high, although it’s still dropped sharply from the levels seen at the end of Q1 and beginning of Q2. In October PSNB excl banks, fell back to £18.8bn, down £2.9bn from the same month a year ago, but still well above expectations.
This higher-than-expected number hasn’t been helped by interest payments which have risen sharply in recent months due to higher inflation. Higher spending on vaccines has also been a factor and is likely to continue to be so, as we look to today’s November numbers, as the booster campaign gets ramped up further.
Borrowing for November is expected to remain high at about £16bn and is likely to continue at elevated levels in the coming months if as expected we get further restrictions in the coming days, that requires extra financial help for the hospitality sector, which continues to feel the effects of the stop start nature of restrictions that has made life so difficult these past 20 months.
EUR/USD – despite a push up towards resistance at the 1.1385 area last week, we’ve once again slipped back, keeping the prospect of a retest of the 1.1185 November lows very much on the cards. We also have support at the 1.1160 level. A move through 1.1420 argues for a move back to the 1.1520 level.
GBP/USD – last week’s rebound took us back towards the 1.3380 area; however, we need to push above the 1.3400 area to stabilise, and push up to 1.3500. We still have solid support above the 1.3160 area, which needs to hold for a longer-term base.
EUR/GBP – fell to the 0.8450 area last week before rebounding. Resistance remains at the 200-day MA at 0.8560, as we continue to range trade.
USD/JPY – found support just below the 113.20 area last week before rebounding. We currently have resistance at last week’s peaks at the 114.30 level. Support remains near to the 113.20 area, as well as the 112.50 level. A move through 114.30 targets 115.00