Having rallied for eight days in a row, it was perhaps inevitable that we would eventually see a sharp pullback in European stock markets at some point this week, and yesterday’s pullback had all the indications of early cracks in a lot of this week’s vaccine-inspired optimism.
For all the positivity about the delivery of a successful vaccine, the reality is that the announcement of a possible candidate was never likely to be able to put a stop to what is currently playing out across Europe, as well as the US, in terms of a sharp rise in coronavirus infection rates, hospitalisations, and ultimately, a sharp rise in mortality rates.
In France, the number of people requiring hospitalisation rose to a record level yesterday, while here in the UK the number of people infected in a single day surged by nearly 50% to over 33,000. With both France and the UK already in the midst of a temporary lockdown, there is a concern that unless the case rate slows, any relaxation of restrictions could take longer to unfold, and increase the longer-term potential for economic damage along with that.
In the US the situation is no less serious, with New York City potentially looking at the possible closure of its schools, while the mayor of Chicago, Lori Lightfoot, announced a stay at home advisory notice for all Chicago residents for a period of 30 days, asking everyone to cancel their Thanksgiving plans, and stay at home other than for work, school or food shopping purposes. This announcement late in the US trading day accelerated the market weakness pushing equity markets sharply lower into the close, and pushing money back into the bond market, as well as the US dollar and gold.
With the worst of the cold weather yet to arrive and the pace of new infections only expected to increase as we head towards year end, it is slowly becoming apparent that the arrival of a vaccine can’t come soon enough. It is also quite apparent that even if one was to arrive in the near future it wouldn’t be able to change the situation on the ground as it is now, which means things are only likely to get worse before they get better.
As a consequence of last night’s sharp US sell-off, markets here in Europe look set to open sharply lower, as the early-week optimism of a vaccine gives way to the late-week reality of surging hospitalisations, and rising death rates. It is these concerns about another heavy hit to economic output that is outweighing the latest economic Q3 GDP data, which showed how well various economies rebounded from their Q2 lockdowns. Yesterday the UK economy rebounded 15.5% in Q3, helped by a decent recovery in personal consumption of 18.3%, however that is now seen as very much rear-view mirror stuff, as will be the case with today's EU Q3 GDP, which is expected to be confirmed at 12.7%.
Of great importance is likely to be how much employment was able to rebound in Q3 after the 2.9% decline in Q2. The fear is that any rebound will be feeble at best, with some estimates of a 0.7% rebound. Given that unemployment is structurally higher in Europe anyway, this will raise grave concerns about the outlook for unemployment in the absence of significant fiscal stimulus from EU leaders. They may well have made progress this week on taking steps to agree a new budget, however they still remain significantly short of agreeing anything that will be able to unlock the new €750bn recovery fund.
EUR/USD – Monday’s key day reversal keeps the pressure on the downside and support at the 50-day MA, near the 1.1750. A move below this level opens up a return to the 1.1680 level, and then the lows this month at 1.1600.
GBP/USD – has started to slip back after failing above the 1.3300 area earlier in the week. The next key support lies near the 1.3070 area, which if broken has the potential to see a move back to the 1.2980 area and 50-day MA. The major support area remains down near the 1.2850 area and the lows this month.
EUR/GBP – found support at the 0.8860 area earlier this week, and rebounded strongly back above the 0.9000 area. We need to move up beyond the 0.9020 area to stabilise and signal a retest of the 0.9080 area and 50 day MA.
USD/JPY – the failure to move through the cloud resistance at the 105.60 level has seen the US dollar slide back with the risk we could well see a move back towards the 104.20 area, on a break below the 104.70 level.