Yesterday’s decline in European markets was simply a case of playing catchup to the declines seen in US and UK markets on Friday, as concerns over renewed US-China tensions weighed on sentiment, though some fairly weak manufacturing PMIs didn’t help the overall mood.

As soon as European markets had closed, US markets started to find a bit of a base and helped by a rebound in the oil price, as well as continued strength in the big tech sector, the early weakness soon gave way to finish the day modestly higher.  The rebound in the oil price was largely driven by expectations of a pickup in demand, as governments continue to gear up for the gradual easing of various states of lockdown, as Italy and Spain relaxed some restrictions, while the UK government outlined its latest guidelines, or blueprint for what is required for a limited restarting of the UK economy.

While April was marked by a collapse in oil demand, as countries across the world locked down simultaneously, the expectation is that May demand could well pick up and that storage capacity could start to rise, on rising consumption, as the oil surplus starts to fall back.  As a result, today’s European open is likely to be a positive one, as we look ahead to another big week for economic data in Europe, the UK and US.

For all of the weakness seen in the manufacturing readings, particularly in the Spanish, Italian and French figures, yesterday&rsquo s numbers are still way much better than the services numbers that are set to be announced tomorrow morning, which are expected to be catastrophic. To get an idea of the extent of the fall off in economic activity that we can expect to see in tomorrow’s numbers, the final UK services numbers for April is expected to be released later today, with the recent flash reading expected to be confirmed at a record low of 12.3, and a composite reading of 12.9. New car registrations for April are also expected to be similarly awful, following on from March’s 44.4% decline, with a similarly epic decline, given that no one could get out and car showrooms were all closed for the most part.

On a more positive note, the UK and US are set to sit down for trade talks later today by way of videoconference. These initial discussions are expected to last about two weeks, and are expected to cover a range of areas including trade in goods and services, as well as digital trade.

While this week’s attention is expected to be largely focused on the data, and in particular Friday’s US non-farm payrolls report, European investors are also likely to have one eye on Karlsruhe this morning and the latest German constitutional court ruling on the European Central Bank's asset purchase programme. Known as the Public Sector Purchase Programme, it started in 2015 and came with certain conditions, including the proviso that any bonds bought had to be investment grade and that any purchases could not be disproportionate to the size of a eurozone members economy. These provisos would rule out Greece’s debt, and if Italian debt were also downgraded, it would do the same to Italian debt.

Now that the programme has been restarted and the ECB has also started a new pandemic programme with looser requirements, some in Germany want these preconditions to be formally enforced or recognised by the court. If the court does decide that some parts of the programme impinge on German constitutional law, they could choose to impose limits on what the ECB, or more importantly the Bundesbank, does. While this court ruling isn’t about the new pandemic programme, any ruling that narrows the scope for action under the terms of the original asset purchase programme, will only open the way for a legal challenge to the new ECB programme, due to its looser criteria.  

EUR/USD – the failure to move above the 1.1000 area has seen the euro slip back with a break below the 1.0870 level potentially opening up a retest of the last week’s low at 1.0810. The highs two weeks ago, and the 200-day MA at 1.1035 are a key barrier to further upside. This remains the next barrier for a move towards 1.1200.

GBP/USD – the failure to crack the 200-day MA and April highs at 1.2645, has seen the pound slip back. This remains a key resistance and a major obstacle to further gains. Yesterday’s slide has seen the pound find support down near the 1.2400 area. A move below 1.2380 could well see a return to the recent lows at 1.2245.

EUR/GBP – yesterday’s rally ran out of steam at the 0.8820 area and has seen the euro slip back. The 0.8670/80 area remains a key support level and while it holds the potential for further gains remains. Only below 0.8670 argues for a return to the 0.8620 level.

USD/JPY – found support just above the 106.20 area last week, with a rebound to the 107.50 area. A break through here could well see a revisit of the 108.20 area initially, as well as the 200-day MA at 108.50.