Equity markets picked up where they left off at the end of last week yesterday sliding back further as concerns about global growth prospects continued to push investors to the sidelines. Global bond yields continued to come under pressure with German bund yields hitting new record lows, while Japanese yields remained negative out to 15 years, and gold prices edged back towards their highest levels this year.

This continued downward pressure on yields and flattening of the yield curve has reignited concerns about the fiscal health of banks across Europe as banking stocks got crushed once again. Italian banks continued to get hit hardest hitting new all-time lows, as concerns about the recovery in Europe fuelled concern about the solvency of the Italian banking sector. Non-performing loans held by Italian banks showed an increase to around 18% in data released last week, as EU leaders continue to argue about how best to deal with them.

The big two German banks Commerzbank and Deutsche Bank also had a day to forget as they fell back to levels last seen in February, when investors freaked out about the banks CoCo bonds, and the banks’ ability to make coupon payments on them.

With the most recent Japanese and Chinese economic data also showing little signs of improvement fears have continued to grow that, after ECB President Mario Draghi’s structural reform warning to politicians last week, Europe could about to turn Japanese with respect to a prolonged period of economic stagnation. 

The pound also slid back to its lowest levels since April against the US dollar as UK gilt yields hit record lows on speculation that the next move on UK interest rates could well be lower, as sterling volatility continues to edge back to levels last seen in 2008.

Since the sterling peaks of last year the sterling trade weighted index has slumped by about 10%, on a combination of concerns about the receding prospect of a rate rise, as well as uncertainty about a slowdown in the UK economy and the upcoming EU vote. In the days since the referendum was announced in February though, it is only marginally lower.

The release of another opinion poll putting the “leave” camp in the lead yesterday showed that last week’s opinion poll showing a strong “leave” lead was no rogue poll and this is continuing to keep markets on edge, though we are still above the April lows for the pound.

On the data front UK CPI inflation is set to pick up in May after April’s surprise dip to 0.3%. Lower airfares and clothes prices prompted a slowdown there but this should see a pickup in the May numbers to 0.4%, particularly given the fuel prices are likely to have prompted a significant uptick now that oil prices have returned closer to $50 a barrel.

One of the many surprises over the course of the past few weeks has been how resilient some of the more recent UK economic data has been given all the hyperbole from the ongoing referendum campaign, and the upturn in the inflation numbers is expected to continue, though food prices could well continue to act as a drag.

Core prices are also expected to push higher to 1.3% from 1.2% while retail prices (RPI) is expected to push up to 1.5%.

In the US we’ve seen a nice rebound in some of the more recent retail sales data, and with the two day FOMC meeting due to start later today there has been some optimism that the US consumer may be about to embark on a comeback. Recent strong personal spending numbers have served to reinforce that but we would need to see some evidence of sustainability given the recent slide in the payrolls data.

US retail sales including autos for May are expected to drop back slightly from the 1.3% gain seen in April and rise 0.3%, with the numbers excluding autos expected to show an increase of 0.4%.

Even if we get a decent set of numbers here, while we may get a further rebound in the US dollar the likelihood of a move on rates tomorrow is pretty much non-existent..

EURUSD – we saw a sharp key day reversal last week, after failing at the 1.1400 area which looks set to prompt a potential move back towards the 200 day MA at 1.1090, and trend line support from the December lows.  We have interim resistance at 1.1320.

GBPUSD – while below the May lows at 1.4330 the risk remains for a move towards the April lows at 1.4010, and the lows this year at 1.3835. Sentiment has turned bearish and we need to see a move back through 1.4400 to stabilise.

EURGBP – yesterday’s run up to the 0.8000 area has seen the euro slip back but if we remain above the 0.7930 level and 200 week MA we could well see further gains through the 0.8000 level towards the April highs at 0.8120. A fall back below 0.7900 suggests a return to 0.7760.

USDJPY – the US dollar has remained under pressure and is now bearing down on the 200 week MA. A close below this level opens up the potential for a move towards 100.70 and the 2014 lows. We need a recovery through the 107.70 area to help stabilise.

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