European markets managed to post a modest rebound yesterday, as investors absorbed the debris of Friday’s big market sell off.
The FTSE100 saw the strongest rebound helped by the big guns from the basic resource and energy sector, while the DAX posted the weakest rebound, having lost over 5% in the last two weeks.
US markets, which also saw heavy declines on Friday, also saw a decent rebound with the Nasdaq 100 reversing all of its post-Thanksgiving losses, as President Biden ruled out the immediate prospect of further lockdowns, although the Russell 2000 finished the day lower.
Concerns over the Omicron variant appear to be hitting sentiment in Europe more than in the US, which isn’t altogether surprising when you consider that the continent is already struggling to get on top of a sharp rise in Delta cases, even without the problems of dealing with a new variant.
Oil prices also pared their rebound on Monday as more countries reported further cases of the Omicron strain, although it has managed to hold above its 200-day MA for now.
This cautious positivity soon gave way to pessimism in late Asia trading on comments from the Moderna CEO Stephane Bancel to the FT, who predicted existing vaccines would struggle with the Omicron variant and who warned it would take months for pharmaceutical companies to manufacture enough jabs at a sufficient scale to make a difference.
His tone contrasts with the likes of Pfizer and BioNTech who suggested any new vaccine would be able to modified fairly quickly. His rather candid comments have also seen oil prices slide back sharply, as an increasingly jittery market react with concern to the prospects of further restrictions and lower demand.
As a result of these rather frank comments, markets in Asia dropped sharply and the gains made yesterday in European trading look set to disappear as we look to a sharply lower open later this morning, while US futures have also rolled over.
As we look ahead to the rest of the week, this morning’s drop in markets shows that sentiment is set to remain extremely fickle until we get a clearer idea of what comes next when it comes to the new variant.
As a result of these latest virus developments, markets are also dialling back expectations of when central banks might look to accelerate any normalisation measures. Expectations had been rising in recent days that the Federal Reserve might accelerate the pace of its tapering program when it meets in mid-December. This now appears to be up for grabs with markets looking to today’s testimony by Fed chair Jay Powell to US lawmakers to gather clues as to the central banks thinking on the likelihood of this happening.
US consumer confidence for November is also likely to be scrutinised for clues, however given the recent divergence with US retail sales that has become a much less reliable indicator in recent months.
The European Central Bank has also started to come under pressure in some quarters over its ambivalence about rising inflationary pressure, with President Lagarde only last week insisting that the central bank wouldn’t be rushed into any hasty moves.
This is likely to be a harder narrative to maintain after German CPI for November surged to 6%, from 4.6% in October yesterday, while Spain CPI hit a 30 year high of 5.6%, however the central bank risks losing credibility with its insistence that the upward pressure on prices will soon pass, if they don’t hit a peak soon, and start falling back.
Today’s headline EU CPI for November is also expected to move higher, from 4.1% in October to 4.5%, although core prices have been much more subdued, and are expected to rise from 2% to 2.3%.
EUR/USD – after Friday’s rebound to 1.1330 we’ve slipped back a touch finding support at the 1.1250/60 area. Last week’s lows at 1.1185, as well as the 1.1160 remain a key support as well with the risk of a short squeeze towards 1.1420 a real risk.
GBP/USD – rebounded from the 1.3275/80 area on Friday but still looks soggy with the potential for further losses towards 1.3160, while below 1.3400. 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 – found resistance at the 50-day MA at 0.8500 last week, with a break higher targeting the 0.8560 area and 200-day MA. While below 0.8510 the bias remains for a drift back lower.
USD/JPY – holding above the 50-day MA for now, but a break below 112.50 argues for a move back to the 112.00 area. Resistance currently at the 114.50 area. A break below 112.60 triggers the prospect of further losses towards 112.00.
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