Global markets sank into a sea of red yesterday, thumped by concerns that rising virus cases would prompt a slowdown in the global recovery story.
It wasn’t just a localised sell-off, all major indexes got clobbered, as did commodities, with the FTSE 100 posting its biggest one day fall since May and closing at a three-month low. The German DAX didn’t fare much better falling to a two-month low less than a week after posting a new record high.
US bond markets, which had been flashing warning signs for several weeks in the form of slowly declining yields, suddenly saw significant inflows, pushing yields even lower, sending the US 10-year yield down below 1.2% for the first time since February, while oil prices fell below $70 a barrel for the first time since May.
The US dollar also saw decent gains with the US dollar index hitting a three-month high, as money flowed out of equities into the greenback and US treasuries. The pound also saw heavy falls, falling to its lowest levels against the US dollar since mid-April, over concerns that the reopening of the economy may well cause more problems than anticipated. The rise in cases could also be prompting some to pare back the prospect of a tightening of policy in the short to medium term if the disruptions currently being experienced across certain sections of the economy get worse.
Yesterday the UK prime minister expanded the list of sectors where employees could be exempt from the normal self-isolation rules in an attempt to ease the concerns about a shortage of staff in certain industries that are considered critical, including people who work in food, water and electricity supply, in the hope that this would alleviate the worst of any disruption.
The sharp rise in virus cases in the UK has prompted the US to put the UK on its 'do not travel' list, dealing a blow to hopes that a transatlantic travel corridor would soon open up.
For so long this year the overriding concern for investors had been that the global economy might be susceptible to overheating, as the reflation trade took hold. Now the worry is that growth might have peaked while prices continue to rise albeit on a slowing basis, raising concerns about stagflation.
As we look ahead to today’s European open, expectations are for an unchanged start, even as markets in Asia saw another negative session, as investors weigh up the possibility that we see further weakness as markets reassess whether this is as good as it gets, when it comes down to the global recovery story, or whether the path out is likely to be much longer than was thought to be the case back in March, when optimism was probably at its highest.
EUR/USD – has managed to hold above the 1.1760 level, however the rebound has been tepid. We need to move through the 1.1880 level to signal a move to the 1.1975 area. A move below 1.1750 reopens the March lows at 1.1700.
GBP/USD – slipped below the April lows at 1.3670 and the 200-day MA, with the bullish case now looking shaky. We need to move back above the 1.3800 level to stabilise, or risk a deeper move towards 1.3570.
EUR/GBP – squeezed back to the 0.8640 area, opening up the prospect for further gains towards 0.8700, if we break above 0.8650. While below 0.8640 we could drift back to the 0.8580 area in the short term.
USD/JPY – fell all the way back to the 109.00 area where we have cloud support. A fall through 109.00 opens up the prospect of a move towards 108.20. We need to push back through 109.70 to stabilise.