Europe set to take a break from yesterday’s declines
gGlobal markets sank into a sea of red yesterday amid fears that increasing cases of the virus could slow the global recovery.
It wasn’t just a localized sell-off, all major indices were squashed, as were commodities, with the FTSE100 registering its biggest one-day decline since May and closing at a three-month low. The German DAX did not fare any better, falling to a two-month low less than a week after setting a new record.
US markets also fell sharply, with the Dow Jones posting its worst drop since last October, while the S & P500 and Nasdaq also ended the day lower.
The US bond markets, which for several weeks had been showing warning signs in the form of a slow decline in yields, suddenly saw large surges, pushing yields even lower, pushing the US yield down to 10 years below. 1.2% for the first, oil prices fell below $ 70 a barrel for the first time since May.
The US dollar also made decent gains, with the US dollar index hitting a three-month high as silver poured from stocks to the greenback and US Treasuries.
The pound has also seen heavy falls, falling to its lowest levels against the US dollar since mid-April, over fears that the reopening of the economy will cause more problems than expected. The increase in cases could also prompt some to reduce the prospect of a short- to medium-term policy tightening if the current disruptions in some sectors of the economy worsen.
Yesterday, the Prime Minister expanded the list of sectors where employees could be exempted from normal self-isolation rules to alleviate concerns about a staff shortage in some industries considered critical, including people who work in the industry. ‘food, water and electricity supply, in the hope that this would alleviate the worst of any disruption.
The sharp rise in cases of the virus in the UK prompted the US to put the UK on its travel banned list, undermining hopes that a transatlantic travel corridor would soon open.
For so long this year, the main concern for investors has been that the global economy may be prone to overheating, as reflation trade takes hold. Now the concern is that growth may have peaked as prices continue to rise, albeit on a slowing basis, raising concerns about stagflation.
As we look to the European opening today, expectations are for an unchanged start, although Asian markets experienced another negative session, as investors consider the possibility that we see further weakness as the markets are reassessing whether this is as good as it gets, when it comes to the history of the global recovery, or whether the exit is likely to be much longer than what was thought to be the case in March, when optimism was probably at its highest level.
EURUSD – managed to hold above the 1.1760 level, but the rebound was lukewarm. We need to break through the 1.1880 level to signal a move towards the 1.1975 area. A move below 1.1750 reopens March lows at 1.1700.
GBPUSD – slipped below April lows of 1.3670 and the 200-day MA, with the bullish case now looking fragile. We need to get back above the 1.3800 level to stabilize, or risk a deeper move towards 1.3570.
EURGBP – tightened in the 0.8640 area, opening the prospect of further gains towards 0.8700, if we break above 0.8650. Below 0.8640 we could revert to the 0.8580 area in the near term.
USDJPY – fell back to the 109.00 zone where we have cloud support. A fall to 109.00 opens the prospect of a move towards 108.20. We have to push back the 109.70 to stabilize ourselves.