After what was a fairly lacklustre session yesterday, European markets closed the day higher, despite concerns about how the new German government will deal with the continued surge and hospitalisations and deaths that are rippling out across the country.
This fairly subdued tone has been replaced in Asia trading this morning by a huge sell off on concerns over a new more transmissible variant of the coronavirus identified in South Africa, and which has also been detected in Hong Kong.
This variant which, it is understood, contains up to 30 identified mutations, has prompted WHO officials to call an emergency meeting to discuss what it means for vaccine efficacy as well as other treatments. The new strain has also prompted the UK government to implement flight bans from six African countries over concern as to what this might mean for infection rates, and other ripple out effects.
The new variant has also prompted other countries to tighten borders and restrictions, with Japan, and Singapore also reported to be tightening border restrictions.
For the moment it is understood that the number of cases is small, but due to the thin liquidity levels in Asia trading as a consequence of the US holiday the reaction does appear to be outsized, with a surge into bonds, sending yields plunging, and gold higher.
Back in Europe concerns about this new variant are the least of governments’ worries at the moment, with outgoing German Chancellor Angela Merkel calling in vain for further restrictions to be implemented however there appears to be little in the way of coordinated policy at a central level to stem the spread of the virus. Incoming Chancellor Olaf Scholz insisted that the new government’s priority is dealing with the crisis, yet seems unwilling to take any further steps apart from the ones taken at the start of the week.
Germany sadly isn’t alone in dealing with a resurgence of the virus, with Italy announcing tighter restrictions along with the Czech Republic and Portugal in the last couple of days.
The deteriorating virus situation in Europe is also being reflected in the recent decline in the euro which is set to post its third successive weekly decline, trading back at levels last seen in the summer of 2020. While part of this is down to weakness against the resurgent US dollar, the decline in the euro has also been reflected against the Swiss franc where it hit a six year low earlier this week.
The rise in the US dollar could start to become a problem as concerns over rising inflation open up the prospect that the Federal Reserve might look at speeding up the pace of the tapering of its bond buying program, when they next meet in December.
In the absence of US markets yesterday, markets in Asia have fallen like a stone, with today’s European open set to see a similarly weaker open, as investors attempt to absorb what this new variant might mean for vaccines, treatments and government restrictions.
EUR/USD – remains in touching distance of the June 2020 lows and the 1.1160/70 area. For the downside pressure to diminish we would need to see a push back above the 1.1400 area. A move below 1.1150 could trigger further losses towards 1.1000.
GBP/USD – continues to slip lower with the bias still for a move towards 1.3160, while below the 1.3500 area. We need to gain a foothold above the 1.3500 area and kick on through the 1.3520 area to open up the 1.3600 area.
EUR/GBP – continues to find resistance near to the 0.8440 level, and while below the risk is for a move below 0.8380 and a move towards 0.8280. Above 0.8440 targets the 0.8480 area.
USD/JPY – while above the 114.50 area the potential remains for a move towards the 116.00 area and then on to the December 2016 peaks of 118.60. A break below the 114.50 level undermines this scenario.