European markets got the week off to an awful start yesterday with their worst one-day performance since June, due to concerns from two separate quarters.

Banks got clobbered on the back of a report that cast serious doubts on various global banks compliance procedures, along with concerns that a second lockdown would increase pressure on their already strained balance sheets, while travel, leisure and retail stocks got clobbered on the back of renewed concerns that tighter restrictions could lead to a sharp and prolonged slowdown in economic activity, over the course of the next six months, and probably even longer.

The resurgence of the virus across the whole of Europe, as well as here in the UK has prompted the realisation that governments, in looking to try and kick start a recovery over the summer, may now have to slam on the brakes, and start to reimpose restrictions on social interactions, as well as other measures to try and slow down the rate of infection. This they hope will head off a rise in hospital admissions, as we head into the autumn period, and ergo an increase in the mortality rate.

The governments biggest problem now is while there was a widespread acceptance of a large-scale lockdown in early March when hospital admissions were surging, the appetite now isn’t anywhere near as great amongst certain sections of the population.

This change has come about as a result of a realisation on the part of an increasing number of people that politicians will at some point need to decide on some level what’s more important. Another lockdown and, or tighter restrictions, with the result that thousands of jobs could be lost for ever as businesses start to close, or finding a way to learn to cope with a virus that is likely to be with us for the foreseeable future. This is the choice now being confronted, the facts of which need to be faced up to, as governments stare at the prospect of their very own no win scenario.  

Sadly, as a result of recent events and the shambolic response to the virus, as well as the mixed signals coming from government, a lot of political capital and trust that was evident in the early part of the pandemic, has been used up, to the extent that people are starting to doubt a lot of what they are being told.

How can they not, when Matt Hancock, the Health Secretary gets up in Parliament and states that the number of people in Europe with Covid is now higher than it was in March. This seems a highly dubious claim, given that the levels of testing back then were nowhere near as high as they are now. It is more likely that more people are being tested now, and as a result more cases are being found, but that is not the same thing.

Later today Prime Minister Johnson will outline the extent of the latest new restrictions to parliament, after last night’s raising of the Covid threat level to 4 from 3, and while there has been widespread speculation as to what form these could take, the reality could be that they are much less stringent than expected.  

Yesterday’s US session saw the S&P500 close lower for the fourth day in succession, its worst run since March, however we did manage to close well off the lows, helped by a rebound in tech which helped the Nasdaq almost climb back off the canvas, closing down a modest 0.13%. Asia markets on the other hand have continued the negative tone, with travel and leisure bearing the brunt.

That said the late recovery in the US could manifest itself into a modest rebound for markets here in Europe when they reopen in a couple of hours.

Gold prices also underwent a bit of a sell-off, hitting a one month low, as the prospect of the pushing back on further stimulus measures by central banks, in the short term, saw the US dollar rebound strongly.

The pound also felt the pressure of yesterday’s selling, as traders weighed up the risks to the UK economy, of tighter restrictions, and as such the prospect of negative rates. Last week’s admission from the Bank of England that they were looking at the practicalities of going down the negative rate route was a bit of a bombshell to markets. There is increasing unease amongst an ever-widening cohort of people about the wisdom of going down a path that has seen zero evidence of being in any way useful, when it comes to supporting the economy. Today, Bank of England governor Andrew Bailey has the opportunity to clarify some of the thinking behind that admission last week when he talks to the British Chambers of Commerce.

Later on, Fed chairman Jay Powell will also be speaking, along with US Treasury Secretary Steve Mnuchin to the House financial committee on the CARES Act.

EURUSD – we’ve seen a move back towards the 1.1720 which remains a key support, a break of which retargets a move back to the 1.1500 area. We need to see close below the 50-day MA to reinforce the downside momentum. The high last week at 1.1900 remains an important level.  

GBPUSD – the failure to move back through the 50-day MA and 1.3020 level, has seen the pound slip back and could see a retest of the 1.2750/60 support area and 200-day MA. The risk remains for a move lower through 1.2730 towards the 1.2500 area, while below the 1.3030 area.  

EURGBP – currently pushing into resistance above the 0.9180 area, with the potential to move towards 0.9220. The move higher still feels stretched with the risk of a move back to the recent lows at 0.9080.

USDJPY – the US dollar rebounded from the 104.00 area but needs to overcome the 105 30 level to target a move back to 106.20. Below the 104.00 area retargets the 103.20 area.