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Europe set for lower open, as Delta concerns rise

Rising Delta cases raise concern over recovery

Concerns about the global economic recovery created a significant amount of volatility in equity markets last week, as the Nikkei 225 posting its biggest weekly loss since May. However, markets in Europe were for the most part able to recover a lot of their equilibrium to reverse most, if not all losses by the Friday close, as the DAX did manage to close out the week higher. 

US markets once again stood apart, with the S&P 500, Nasdaq and Dow all closing at record highs, despite bond markets that saw yields decline for the second week in succession. Since March, when it closed at 1.746%, the yield on the US 10-year yield has fallen for three months in a row, and appears to be on course to do the same in July.

Last week’s events appear to paint a narrative of some concern that the reflation trade is either in trouble, or merely being delayed, due to concern over rising Delta variant cases in Asia, which has prompted a number of countries including Japan, South Korea and Australia to reimpose tighter restrictions. We’re also seeing higher case counts in the UK, US and Europe, which could also add to the uncertainty, although in the case of the UK, the high levels of vaccination are keeping hospitalisations and deaths low for now. Whether that stays the case remains to be seen, but the lower vaccination rate in Europe could prove problematic in the days ahead, which mean help explain this morning’s weaker European open.

Stock markets appear to be fairly comfortable with either scenario, as evidenced by last week's recovery, although truth be told European equity markets haven’t really gone anywhere in the last few weeks, with both the FTSE 100 and DAX being confined to a clearly defined range.

As we look ahead to a new week, the main focus is likely to be on the release of a raft of economic data from China in light of last week’s loosening of monetary policy by the People’s Bank of China. The cut to its banks' reserve requirement ratio by 50bps is perhaps a sign that the world's second biggest economy maybe isn’t anywhere near as resilient as first thought. As a consequence of that, investors will be looking towards this week’s release of China’s latest Q2 GDP data, as well as the latest June numbers for trade, retail sales and industrial production, for signs of weakness in the China recovery story.

We’ll also be looking to the start of US banks' earnings, starting with JPMorgan Chase and Goldman Sachs tomorrow, with expectations around their Q2 numbers tempered by recent warnings from JPMorgan CEO Jamie Dimon at the end of last month, when he warned that trading revenue could be lower than the consensus estimates of $6.5bn, as lower yields and volatility impacted turnover. Dimon also played down expectations over loan demand and income after a bumper Q1. The trend over loan demand was also notable in its Q1 numbers, which the bank said was likely to remain challenged.

After the losses of last week, markets in Asia have started the week in a much more positive fashion, helped by the Friday recovery in European and US markets, but as ever the mood still remains cautious. This rising uncertainty appears to be benefiting the US dollar, although the euro has managed a decent recovery from three-month lows last week, with ECB president Christine Lagarde declaring at the weekend that the central bank would be reviewing its policy guidance at next week’s meeting on 22 July, with the PEPP likely to see some tweaks in order to support the recovery into and through 2022.

In light of the events of the last few days and the rise in Delta variant cases, optimism over the economic rebound and possible tightening appears to have shifted markedly from some central bankers, to concern that further measures from central banks could be needed to support the economy as we head towards year end.

EUR/USD – found some support at the 1.1780 area last week and looks set to push back towards 1.1975 and the 200-day MA on a break above last week's high at 1.1895. Support comes in at the 1.1780 area.

GBP/USD – the major support on cable remains down at the 1.3670 level and March and April lows. Last week we rebounded from the 1.3730 area, with last week’ s break above the 1.3870 area opening up the prospect of a move back to the 1.4000 area.  

EUR/GBP – continues to range trade between the 0.8530 area and wider resistance at the 0.8640 level. Bias remains for a move towards 0.8480 on a break below 0.8530, while below 0.8640.  

USD/JPY – last week’s break of the uptrend from the lows this year saw a big sell off after peaking at 111.70 earlier this month. The next support comes in at 109.20, and daily cloud support. A break below 109.00 opens up a move towards the 108.60 area.

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