European stocks may well have finished last week higher, and still within touching distance of their record highs, but the declines seen on Friday, which wiped out the gains of the previous three days suggest that markets are acutely vulnerable to sudden shifts in sentiment.
The imposition of another lockdown in Austria, following on from the reintroduction of tighter restrictions in the Netherlands, as well as in Germany, has punctured the optimism that the vaccines could offer a clear way out of the pandemic and a resumption of normal life, as we head towards the Christmas period.
The realisation that a number of countries could see another disrupted Christmas hasn’t gone down well in a number of European countries with civil disorder breaking out in a number of countries across the region, with Dutch police firing on demonstrators in Rotterdam, while in Austria protests broke out in Vienna over the governments mandating compulsory vaccination from 1st February next year.
There’s also been protests in Belgium, Croatia and Italy over the modest tightening of restrictions there as a number of European countries run the risk of losing control of the virus.
The prospect of new lockdowns and tighter restrictions has also seen oil prices slide sharply, Brent crude prices sliding back for the fourth week in succession, and closing below $80 a barrel for the first time in seven weeks, on concern over weaker demand.
While the slide in oil prices is a welcome development in terms of concerns over higher inflation, the collateral damage from tighter restrictions won’t do much in terms of alleviating supply chain disruption. The one upside to temporary lower demand is it allows the opportunity for inventories to recover.
The US dollar has been the main beneficiary to the recent deterioration in sentiment, along with the resilience of the US economy which is fuelling speculation that the Federal Reserve might have to go faster when it comes to its tapering program, thus bringing closer the prospect of a US rate rise.
This prospect doesn’t appear to be unduly worrying US investors, where we’ve also seen new record highs, and only modest declines on Friday, in contrast to markets in Europe.
The prospects of a faster taper were given added weight by comments from a number of Fed policymakers, including Fed governor Christopher Waller, and vice chair Richard Clarida on Friday who both indicated that it could be appropriate to speed up the taper process.
While the debate in the US is about how fast the Federal Reserve is paring back its asset purchase program, and the timing of its first interest rate rise, the European Central Bank appears to be in no hurry at all after President Christine Lagarde said that the central bank was nowhere near considering the prospect of even considering the timing around a rate increase.
With ECB and Federal Reserve minutes due this week, both should give us an insight into the discussions and disagreements over monetary policy amongst the various members of both committees.
Speculation over whether we can expect to see a modest rate rise from the Bank of England next month has continued over the weekend, with governor Andrew Bailey following chief economist Huw Pill on Friday by saying that inflation risks are two sided, and that current supply chain disruptions were causing a lot of the problems, which he said the central bank could do very little about. Consequently, this was one of the reasons why the central bank felt compelled to delay a decision on a rate increase, and was, he claimed, completely in line with what he said in October.
Of course, if that was the case, markets wouldn’t have jumped ahead in terms of their rate rise expectations, and which they are now starting to do again, albeit more cautiously. The Bank of England needs to tread cautiously here, as it runs the risk of once again muddying the message.
Over the past few years, the Bank of England’s forward guidance has been woeful, and sadly shows little sign of getting better. Maybe the Bank of England and other MPC members would be better off by speaking less, after all in the words of the song, sometimes they can say it best by saying nothing at all.
EUR/USD – the failure to overcome the 1.1400 area keeps the pressure on the downside and a test of the 1.1160/70 area, and June 2020 lows. We need to push back above the 1.1400 area to stabilise and retarget the 1.1530 area.
GBP/USD – fell back from the 1.3510 area last week, but is still above the 1.3350 lows of last week for now. A break below 1.3350 targets a move towards 1.3160. We need to gain a foothold above the 1.3500 area and kick on through the 1.3520 area to open up the 1.3600 area.
EUR/GBP – managed to hold above the 0.8380 area last week, however the risk remains for further losses towards 0.8280. Only a move through the 0.8470 area opens a move back towards the 200-day MA and the 0.8580 area.
USD/JPY – slipped back to the 113.50 area, but while below the 115.00 area the risk remains for a move back towards 113.20, and then down to 112.40. We need to move through 115.00 to target 116.00.