Despite a decent recovery on Friday, European stock markets still finished the week lower on a combination of concerns, including worries over vaccine setbacks, as well the prospect that new lockdown restrictions in the face of rising infection and hospital admission rates, would kill off whatever vestiges of a nascent recovery there has been since April, when lockdowns started to get eased.

Events over the weekend have done nothing to alleviate these worries, with the Italian government readying new measures, at the same time as London and Paris get used to more restrictive controls. Belgium has also announced the closure of all bars and cafes for four weeks, with Ireland expected to do something similar later today, with many warning of the risks of a double-dip recession. Europe in particular is vulnerable, a point acknowledged at the weekend by ECB president Christine Lagarde.

Given the current backdrop such an outcome is almost inevitable, particularly since the political consensus that was evident in March at the beginning of the pandemic, is now starting to fracture, as battle lines get drawn between those who are pro some sort of circuit breaker lockdown, and those who are sceptical that it will do nothing more than delay the inevitable, as well as finishing off already struggling businesses.  

While markets in Europe struggled last week, US markets managed to close the week slightly higher, buoyed by a combination of surprisingly strong retail sales data for September, as well as optimism that US policymakers might be able to arrive at some form of stimulus deal before next month's election.

This hope still seems a big ask, particularly since most of the talks appear to be designed to give the appearance of being seen to engage, without any intention of doing a deal. House Speaker Nancy Pelosi has continued to give the impression of wanting to do a deal, setting a deadline of tomorrow for more progress, however it seems quite clear she has no intention of doing so, and that both sides appear intent on trying to assign a blame game when the talks reach their natural denouement.   

While Europe appears to be battling a slowing economy, and the prospect of a surging second wave, the Chinese economy finally appears to be gaining traction, after months of sub-par consumer spending. Last week’s September trade numbers finally showed some evidence that internal demand was starting to pick up after several months of lacklustre activity, as imports rose 13.2% to their best levels this year.

This outperformance raised expectations that retail sales in September would finally start to show signs of life after months of weak readings. The performance of the Chinese consumer hasn’t been the same since the country came out of lockdown at the end of February, though optimism in the summer started to improve as a result of positive data from the auto sector, with reports from the likes of Daimler, as well as Apple talking of some decent rebounds in their Chinese markets.

Despite this optimism, retail sales in China only struggled back into positive territory in last month’s August numbers when we saw a rise of 0.5%, a pretty pathetic number when you consider China came out of lockdown in March. Today’s September reading has taken the recovery story a step further with the second positive reading this year, with a rise of 3.3%, well above expectations of 1.5%.

This still remains well below the 8% gain seen at the end of last year, and is still 7.2% lower year to date, but it does appear to show that the Chinese economy is starting to approach escape velocity. Manufacturing has also been doing much better relative to the Chinese consumer, rebounding to its best level in almost a decade in July in the various official and private sector PMI’s. Industrial production also continued its recent outperformance returning a steady 6.9%, a decent increase from 5.6% in August, and the best level since the end of last year.  

We also got sight of the latest Q3 China GDP numbers which showed that the economy grew by 4.9%, following on from the 11.5% rise seen in Q2. The Q2 rebound more than eclipsed the -10% contraction in Q1. Markets in Asia have started the week in a fairly positive fashion on the back of these Chinese numbers, and this appears to be helping to prompt a similarly positive start for markets in Europe this morning, as investors continue to look for some sort of direction.

The pound has managed to hold up fairly well despite the UK being on the receiving end of a ratings downgrade from Moody’s ratings agency on Friday to Aa3, with a stable outlook. These types of events from credit rating agencies have lost their capacity to shock since the financial crisis, and now tend to get met with a collective shrug, simply because on balance they merely tend to state the obvious, and because everyone is in the same leaky boat.

The agency said that they expected GDP to be “meaningfully weaker” than originally envisaged due to a combination of the pandemic weighing on the services sector, as well as upcoming no-deal Brexit concerns. Moody’s also expressed concern about a “weakening in the UK’s institutions and governance” over the past few years. This could well be a direct reference to the recent deterioration in the quality of the UK’s political leadership, as well as political opposition, however the UK isn’t exactly unique in this regard, given the lack of political leadership elsewhere in the world including the US, as well as Europe.

It's also set to be a big day for central bank speakers, as with the likes of Fed chair Jay Powell and ECB president Christine Lagarde set to speak later today, along with Bank of England deputy governor, Jon Cunliffe, where markets will be looking for further clues as the UK central banks leanings when it comes to negative rates. There appears to be quite rightly some division on the MPC on the wisdom of going down such a path, if recent comments from deputy governor for markets and banking, Dave Ramsden, are any guide, so it will be interesting to see if Jon Cunliffe’s thinking has evolved from what he said in June, when he sat on the fence on the subject.

EUR/USD – last week’s failure to push above the 1.1800 level has seen the euro slip back with the focus back towards the 1.1615 area. Resistance is still back at the 1.1780 area, and while below the risk is to the downside. Above 1.1780 retargets the 1.1830 level.

GBP/USD – has been surprisingly resilient, hitting a one-month high last week at 1.3082, before slipping back. Currently has solid support at the 1.2850 area, with a break targeting a move back towards the September lows at 1.2675. Brexit headline risk is likely to continue to be the primary driver here, with the risk very much to the upside, and for a move towards 1.3220, while above 1.2800.  

EUR/GBP – has continued to drift down from its September peaks with downtrend line resistance at 0.9125 currently capping any rebounds. While below here the risk is tilted towards the downside. A move below the 0.9000 area, has the potential to open up further declines towards 0.8920.

USD/JPY – appears to have found a bit of a base around the 105.00 area, and while above the 104.80 level is vulnerable to a squeeze higher. A move below 104.80 targets a return to the September lows at 104.00.  Resistance remains all the way back at cloud resistance at the 106.20 area.


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