After an initially positive start to last week, largely due to a significant amount of M&A activity, sentiment turned sour towards the end of the week, on a combination of concern about rising infection rates, a warning from the WHO about a serious situation developing in Europe, and central banks that decided to sit on their hands, when it came to implementing fresh stimulus measures.

US markets also continued their own recent losing streak, falling for the third week in succession, the first time we’ve seen three consecutive weekly losses since September last year, with the main weight of the losses being felt in the tech sector.

As we look to a new week, with investors absorbing the recent statements from central banks, and the prospect that further stimulus may not come immediately, concerns are rising that the summer recovery is probably as good as it gets when it comes to the recent rebound in economic activity.

This reality combined with the growing realisation that a vaccine remains many months away, despite President Trumps claims to the contrary, has made investors increasingly nervous, as we head into an autumn that could see lockdowns reimposed, and a US Presidential election whose outcome could well be too close to call, with two fairly unimpressive candidates.

Last week we saw central bankers sow a fair deal of confusion and uncertainty about the glide path of their next policy steps. Fed chairman Jay Powell certainly has his reasons for being deliberately opaque this close to the US election, however he was very clear that US rates would not be going anywhere between now and 2024, as the central bank looked to meet its new policy of average inflation targeting, even if he wasn’t prepared to spell out exactly how the Fed would go about looking to achieve this.

Over the next four days investors will be hearing from Jay Powell quite a lot, while tomorrow and Wednesday he will be testifying before US lawmakers on the CARES Act, as well as the Feds response to coronavirus. We’ll also get to hear from the likes of permanent Fed Governor Lael Brainard, as well as the Chicago Fed’s Charles Evans, Thomas Barkin from the Richmond Fed, Loretta Mester from Cleveland, the Boston Fed’s Eric Rosengren, and Mary Daly from the San Francisco Fed over the next two days.

Tomorrow we’ll also hear from Bank of England governor Andrew Bailey, where he’ll be talking to the British Chamber of Commerce, where hopefully we’ll get to find out how serious the central bank is about the prospect of negative rates, and under what circumstances the MPC might consider them in any way useful.

Last week’s talk of the prospect of negative rates clobbered banking shares last week, and we could well be set for further weakness this morning after reports from China’s Global Times newspaper that suggested that HSBC might find its way on to China’s unreliable entity list as a threat to national security. If this were to occur it would make it extremely difficult for the bank to operate in what is one of its most important markets. The HSBC share price was also under pressure in Asia this morning after being named in a banking report, along with Standard Chartered, in a list of banks that have conducted business with dubious counterparties.    

At a time when concerns are rising about the resilience of the global economic recovery, Wednesday’s flash PMIs for September, could well offer further evidence of an economic slowdown as a result of rising infection rates, and localised lockdowns, hitting economic activity.

Set against these concerns as to what next steps governments might take to try and balance off the competing demands of the faltering economic recovery, against a surge in infections causing a rise in hospitalisations, we now have the spectacle of scientists and epidemiologists publicly disagreeing on what steps to take next, with some politicians only too keen to foment some of these divisions. In the UK, there is talk of another lockdown in London as Mayor Sadiq Khan mulls his next move vis-à-vis surging infection rates here.

For now, equity markets, despite their recent weakness, show little signs of being particularly spooked in the same manner we saw in February,

For all of the above it is becoming clearer that sectors like travel, leisure and hospitality won’t be recovering anytime soon, with some significant weakness at the end of last week, as hopes of a return to any type of normal recede into next year.

The decline in the share price of Rolls-Royce last week was a particular case in point, its shares at a 16-year low over concerns about its ability to raise new funds, at the weekend it was being reported the company was in talks with sovereign wealth funds to raise £2.5bn in order to help shore up a balance sheet that is haemorrhaging cash. With net debt of £4.4bn there are also increasing concerns in government, which already owns a “golden share” that the business may need a bailout if it is unable to get itself over the hump of the next couple of years.

Markets in Asia have got the new week off to a weaker start on the back of the weak finish in the US on Friday, as well as this morning’s reports about HSBC, and as such markets here in Europe look set to start out with a similar negative bias.  

EURUSD – slid back towards the neckline support last week but was unable to break below the 50-day MA, rebounding from 1.1738. The 1.1720 level remains a key support, with a break targeting the 1.1500 area. The high last week at 1.1900 remains an important level. Above 1.1920 retargets the 1.2000 area.  

GBPUSD – the pound took a bit of a tumble last week, however the losses proved short-lived, with the next key resistance remaining at the 1.3020 area, and 50-day MA. The support still seems fairly solid, down near the 1.2750/60 area and 200-day MA support. The risk remains for a move lower through 1.2730 towards the 1.2500 area, while below the 1.3030 area.  

EURGBP – currently have resistance at the 0.9170/80 area. We need to hold below this level to keep the onus on the downside, and a retest of the 0.9080 area, and possible lower towards 0.9020. Above 0.9170/80 retargets 0.9220.   

USDJPY – the July lows at 104.20 remain a key support, with a retest still the favoured option, while below the 105.30 area. Above 105.30 retargets the 106.20 area.


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