GBP Drops As New Virus Variant Results In Tighter Restrictions

OK, very good morning. It is Monday, 21st of December. First and foremost, I hope everyone is safe and sound. You know, 100%, that's the most important thing at this time, given the worsening situation we're seeing with COVID globally at the moment. You know, given the job that I do, I have to talk about these things. And I have to talk about them as objectively as I can, but never forgetting and being sympathetic, of course, to the people that have been impacted by COVID-19. So just wanted to put that out there first before I really get into the briefing this morning. But let's just have a look at things and what's going on this morning and get you up to speed. And very much so, a busy reopening of electronic trade last night. So for those guys who are on the private feed on Amplify Live. Tim went live last night at around 11 PM and was live for a couple of hours last night because of the fact that there was some quite significant price movement across the different asset classes, and namely because of the fact that the COVID-19 situation in the UK has developed very quickly with this new variant. Cases are on the rise very quickly, and it's meant that a number of countries now have suspended any incoming flights from the UK. And so consequently, that coupled with a, I think, unsurprising lack of progress in the Brexit talks has meant that the pound gapped lower and has remained under considerable pressure since the overnight session. So you can see here we closed in sterling futures on Friday up at around 1.3539 type handle, and we were down in the overnight session, the low that was seen during the Asia-Pac trading hours, is around 133.49. So pretty significant move already in terms of that pound movement. Actually, just a quick look at the chart, it's not too indifferent from what we were talking about as potential scenarios last week. You remember, this was that weekly chart that we had in focus, and we were kind of suggesting that we could have squeezed up on the breakout through that important around 135 technical area We, we basically hit pretty much to the tick the 618 fib retracement of actually the entire high to low from the referendum move going all the way back to 2016 before the market's taken this latest turn and obviously gapped down and under some selling pressure this morning. And this is kind of what we were anticipating to the extent of a lack of Brexit deal making markets continue to be quite sensitive to the weight growing of the risk or probability of a no deal increasing coupled with the ongoing worsening situation with COVID in the UK requiring further restrictions to be put in place, which of course are going to impact the economic recovery elsewhere. Then Europe has followed suit, so the dollar index is up fairly significantly this morning, we're up around 0.43%. So EURUSD has come off as well, and we've come down to a fairly interesting level here as well from a technical point of view. If I just shrink the chart a little bit so you can see it here, you've got going back really throughout the month of December, uh, this was resistance back on the 3rd and 4th and 14th of December, and we come back down close to that in some of the overnight selling pressure that we're seeing. But again, much of those moves came at around 1, 2 AM this morning London time. So since then we have had a bit of a bounce, and now on any recovery be looking at that S2 as a pretty decent area of resistance then, potentially then for a continuation of this move when the US come in in a few hours' time. If we come back up to trend back down toward the bottom end of that range and that significant technical level at 122 handle in the futures. Um, elsewhere, equity index futures actually, um, a little bit mixed but definitely not as pronounced selling pressure as what we're seeing in Europe given the more tangible risk of the spread of this new variant of the virus eminating out of the UK. So the DAX has already come under some pretty severe pressure at the reopening of trade electronically last night. And here this morning, as Europe's come in, it's just had a brief false break, then back on that key, uh, low. So that would be an area to watch. You can see here the previous resistance point we had on the 15th, had a couple of tests overnight in Asia, but it has held. And it's just looking a little heavy again this morning ahead of the cash open shortly, in a few hours' time. US futures though have been a little bit slower to react. We have had some stimulus news where it looks like they are going to sign off the latest relief package, and perhaps then that's just counteracting things a little bit. And it's also might, you know, apart from a flight to safety in the dollar, might be helping that just bounce a little bit on confirmation of the stimulus deal getting done. But I do think that there potentially is some room when we go into the North American crossover for them to really wake up and smell the coffee of, of Europe's reaction to what we've seen with this latest COVID developments and subsequent renewed restrictions that are being put in place. And so what we're just saying is seeing here S&P is just printing fresh lows, just breaking beneath the low from the Asia-Pac session. But I think there's some room there for, for some downside in US equities as catch-up. But perhaps that move won't really come until, until the US come in. And then in oil, as you can imagine, with the two commodities, oil lower, gold higher, all on the back of this news I've just been talking about. So, you know, oil really did see a really strong move to the upside last week. You can see going through $47, $48, and $49, approaching really up to around those highs that we were printing, going all the way back to where we were right at the beginning of the year, really in the fourth support on the 4th and 10th of Feb that we had before the kind of breakdown in price that came later in that month. And so a bit of a pullback, that does mean I'd say oil perhaps susceptible for even a little bit more further on a retracement. A key area on the higher time frame be looking at really around $46.26 in the futures On the more kind of focused chart on the 30-minute candle, you can see the move, a combination really of demand repricing given the situation now with COVID particularly in mainland Europe, but also not forgetting as well the situation in the US is still particularly severe at this present point in time. And coupled that then, I think, with some profit taking given that run-up, and the end of the year, good time to book took some profits on that trade, perhaps, with all things considered. And then gold, yeah, it really did shoot up last night. You can see this was the reopening of trade. We gapped up a little bit, took a bit of time to get going, and then at midnight it really started to liven up. And then we were bid all the way into just recently now, a bit of profit taking as Europe's come into the market here at around 1912, marking the high. Uh, but you can see technically we broke out of what was an area of resistance which was holding some of the price action. You can see here toward the back end of last week, this would have been Thursday, just short of the $1,900 handle. We've managed to bust through that this morning on the back of this news as we continue to attempt to reverse some of that first initial— I think it was the 10th or 9th of November positive Pfizer vaccine news that came out. So gold, well bid. I think one word of caution here is that quite a bit of that move did occur in the overnight session early on. There would have been a lot of people tracking the news at the weekend, and quite rightly, as we were covering on our Amplify livestream last night at around midnight, 1 AM, that was the opportune time to catch some of these moves. I'd say if there's going to be a secondary follow-through and a continuation of the trends Perhaps you've got to wait till the states come in really to, to see that unfold. But let's get into some of the headlines and talk about the news then. And I'm going to kick things off by talking about this COVID situation, a particular focus on the UK where the Health Secretary Matt Hancock, as you would have seen, has warned that the new strain of coronavirus is, quote, out of control, and suggested parts of England will be stuck in the new highest tier of restrictions, i.e., 4, until a vaccine is rolled out. Now, as you will know, that in itself is a kind of tenuous hint toward the fact that perhaps we could remain in these high-level restrictions, as I'm going to discuss, perhaps even more stringent, going into full nationwide lockdown, or even more so, the worst economic situation that would weigh most heavily on the pound would be reverting back to the type of lockdown that we had in the spring. Spring, which I do think is of a fairly high probability, all things considered, the way that this virus is developing and with this potential super spreader event, irrespective of the latest measures that have been taken at the end of last week from the UK government. Here's a, here's a map then, given the changes. These were the current tiers, you know, took this on on Friday when the announcement was coming, and this is what the new tiers look like. So as you can see here, it's the Southeast that have gone into the highest Tier 4 status at the moment, some other areas, uh, brief isolated counties as well. But as I said, it could be then that given that we already know that the rollout of the vaccine is going to go in phases, we know as well that there's the complexity of the fact that with Pfizer, for example, although they've tried to offset it, there are logistical manufacturing and therefore distribution issues that particular vaccine faces given its ultra— its need for ultra-cool storage on transportation and storage. So these sorts of things are a hindrance because the first people to get it obviously are the elderly, frontline workers, and then people with underlying conditions. So it will likely mean then that these tiering systems will need to be fairly onerous and in place for a fairly long period of time, which I think is a definite adjustment then, and hence consequently the movement in markets to where we were expecting things to be developing through Q1, Q2 of next year. I think that has now shifted. As we were talking about with the virus last week, we were kind of continuing the quite, quite quite bearish on the situation. This is one of the things that I was talking about quite a lot at that time, which was the event of Christmas. And I did think that it was somewhat inevitable that government would have to concede on this idea of loosening restrictions for that period. I think it was previously from the 23rd to the 27th. I was looking at this company, they're called Edge Health, and they basically run kind of quantitative analysis over different data models for COVID-19, and they provide information then to supply to other industries and bodies and so on. And they were looking at that if family gatherings lift the R rate, so the reproductive rate of the virus, by 30%. And the reason why they're saying 30% is they're using that as a reference point for what happened after Thanksgiving in parts of the US. Then their projections suggest in England will— deaths will peak at over 4,000 a week by the end of January, which would be considerably higher than where they are at this present point in time. So here, this is running a data model over if the UK government were to impose a full nationwide early lockdown, i.e., as of today. And obviously that's not the case at the moment, then this would be the projected direction of the weekly case rate in England. This would be under scenarios then of 10%, 20%, and 30% reproductive rate and what the case numbers would, would potentially look like. So looking at a worst case here of kind of just over 400,000 cases in a week period. The other thing this has led to then is Germany, France, Italy, the Netherlands, Belgium, Austria, Ireland are among those that have suspended flights from the UK. Uh, outbound train services through the Channel Tunnel have been halted, and Canada have halted also all UK flights. So this is definitely the first response, uh, just given that although it hasn't been pinned down yet, the evolution of this virus through the new variant supposedly from the southeast of England which has seen a very sharp acceleration in growth in the likes of Kent and surrounding counties. And so precautions are being made across Europe. So hence the reason why, you know, this new kind of fear now of accelerated spread, because health officials have said that the new variant is up to 70% more transmissible, but there is no evidence that it is more deadly. There's also no evidence to suggest that it reacts differently to vaccines, which of course would have been a massive risk for markets. If testing and the vaccine are rendered redundant, well then there really is no protection against this new form of COVID-19 until they can come forward, understand the actual mutation more, and then look to rejig those, those things, which are going to take a considerable period of time. One word of warning there is there is a little bit of contrasting views here. There are other medical experts I was reading over the weekend who basically were saying that it's way too early to draw those definitive conclusions that this latest version of COVID-19 is, is not as deadly. And so that is something to be mindful of and something to be, to be looking out for in terms of potential significant impact that that can have on markets. Overall then, the conclusion in my mind is kind of twofold. I think if anything, the way that this is now evolving, given the fact that there's Christmas, which even with these measures undoubtedly will probably see cases accelerate even further, not forgetting as well that, you know, at the moment the weather really hasn't got that cold, and that's going to be a key period of through January and February. So things are going to be particularly testing. And I think from a market's perspective, for me, it's really about the vaccines. I read some headlines this morning that AstraZeneca will be looking to get approval by the end of this month. And really, that couldn't come sooner because although Pfizer and Moderna have been kind of fast-tracked and first to market, it's about the net cumulative amount of other companies with their vaccines coming to market. Is going to help then speed up the inoculation process. Now, so that's going to be very key— vaccines, their approval, their manufacturing, of which has been a little bit problematic in the likes of Pfizer. But pretty much all the pharmaceutical companies so far have rolled back, if not halved, their manufacturing targets over recent weeks. So anything like that I think is going to be particularly particularly sensitive for markets going, going forward. The other thing then is this kind of rollout vaccination program. And I guess that'd be a net consequence then of that manufacturing. If there are any logistical issues, this is only going to prolong the current worsening state of affairs that we're in at the moment. The other thing then is the risk of strict and long-lasting lockdown measures. This is something I was writing about in my kind of note for the week ahead. I do think that there is a real possibility here that the current Tier 4 for, for the Southeast will ultimately result in the rest of the UK going into full national lockdown like that we were already in, in November. I do see that as probably the most likely case, particularly post the Christmas period, and then whether or not we go even stricter with some of those specific rules to take us back to the spring, I also think is, is a significant chance of that as well, which does mean that I think as far as the, the pound is concerned, again, it's got to be repriced in because it's going to be somewhat compounded by the increasing risk as we go through post-Christmas because I really don't see a Brexit deal happening between now and then, and then up to Dec 31st before we get a decision about what exactly is going to happen. With Brexit, you know, with the, the chance for no deal increasing. On that front, what is actually the latest on Brexit? But just before I move on to that, the European Council meeting of government representatives is expected to take place at 10 AM this morning London time in regard to their catch-up on this latest COVID situation. On Brexit, what is the latest here? Well, shock horror, they didn't strike a deal over the weekend, but to be quite frank, given everything else that is going on and fluidity of this latest COVID development and the response that's being coordinated across Europe, I can understand why Brexit's probably not at the, the center of attention at the moment for a number of the heads of state. The latest here is that Britain were insisting over the weekend that basically the European Union needs to shift on its position in order to cultivate some type of breakthrough in negotiations. British officials insisted EU offer on fisheries and fair competition, level playing field, remained unacceptable. That was the current latest state of affairs. It came with the latest European kind of commentary at the weekend suggesting that, look, a deal needs to be done on Sunday, otherwise they're going to walk away because it won't give enough time time for EU Parliament to vote through any type of deal. Obviously that time has come and passed, and despite everything that both sides are saying, they're going to reconvene, start talking again in Brussels as of today. So it's the usual, I guess, sequence of events, I would say. And so they will continue to be Brexit comments, but I think timing-wise now, for me, I think if there is a deal to be done or a delay which I do think is a growing chance of that happening, which is at the moment legally, obviously, the transition is December 31st, but these things can change. Of course they can. And so I wouldn't be now, I'd say, too surprised if they just— given what's happening at the moment with COVID-19 and with the potential risks surrounding the Christmas period, if they just delay this. And by what date, I don't know, but buying themselves another period of time to just hash out these latest talks in order to just deal with the more, I guess, cataclysmic event, which is that of a health crisis unfolding with COVID-19. So at the moment then, there's still some risks assigned to increasing pressure on the pound not just on restrictions and COVID, but also on this prospect of potentially no deal. Because as much as my feelings might be saying, or expectations growing towards an inevitable another extension here, until that happens, then the risk is of a disorderly no-deal Brexit, which of course would have ramifications heavily on the pound in the immediate reaction. So things still to monitor. Uh, the one thing I would say is that if you're going to be trading throughout that period, particularly between Christmas and New Year's, things typically are quite thin, and that does then exacerbate potential price movement. So things could get quite choppy as we go into the end of the year. The other thing from overnight, which is a little bit more positive, was US stimulus. So congressional leaders have reached a deal on roughly $900 billion spending package after senators struck a late-night compromise on one of the final hurdles, which was in regard to the dispute over the Federal Reserve's pandemic lending authorities. The plan, the latest one that they've constructed overnight, would provide direct payments of $600 to most Americans, $300 per week in enhanced unemployment benefits through March, and there'd be $284 billion for the Paycheck Protection Protection Program that provides forgivable loans to small businesses. This latest relief plan is going to be attached to a $1.4 trillion bill that would fund the federal government through the fiscal year of September 30th, 2021. Last night, obviously, there was a risk of a government shutdown, but Trump signed a 1-day temporary extension of government funding passed last night by both the House and the Senate to avoid that partial shutdown. So very much now expecting that to come through later on today. The interesting thing about this would be it's obviously somewhat of a relief that from a real tangible point of view this is going to happen, government-funded, people are going to get these stimulus checks and so on. However, be interested to see whether we go into year-end, is this the case a little bit of buy the rumor, sell the fact? Markets have been very bid on the back of the stepped, slow-step progression in these talks. US equities, as we know, have been clawing out new all-time highs, the likes of the NASDAQ and the S&P. You know, is this just an opportunity now to book some profit, uh, just going into year-end? That coupled with as well the ongoing COVID situation, which is getting worse, not better, at present, um, could we, could we see that as start to play out as we go further forward. Could well be the case. The other thing was the meeting that happened between Russian and Saudi officials in Riyadh at the weekend. And Moscow, the energy minister, he's going to be— Novak's going to be flying out to meet with Iran's oil minister, I think today or early this week. Basically, the end result of their conversations, the Saudis and Russians, was that OPEC+ will react faster to changes and take a more hands-on approach with oil market thanks to an accelerated schedule of monthly meetings. Now, if you remember, uh, the new plan that they had, the increased production of 500,000 will start to kick in in the new year, but they're then also going to review that status of those supply cuts every month rather than 6 and 3 months as they were doing before in the past. And so they're just kind of putting out the stall that, look, we're ready to act if need be. And, uh, definitely if COVID starts to develop and this new variant spread resulting in many more stringent and lengthy lockdowns, not just in UK and mainland Europe but across the world, then I think definitely OPEC+ will have to reconsider, um, the trajectory of their plans in regards to their supply pact at the moment. Quick look at the other things that are happening this week. As you would imagine, the calendar is fairly quiet, particularly today, which I think just draws ever more focus to those main themes we've been discussing into play for market sentiment today. And then going further forward, aside from COVID the US stimulus, Brexit, the other things we're looking out for on a data perspective is US GDP. We're going to get the second reading of Q3 GDP on Tuesday. You've also got personal spending on Wednesday. It's likely to be soft given weak retail sales numbers, but the manufacturing data suggests durable goods will be relatively firm, as according to analysts at ING. Durable goods coming out on Wednesday with the core PCE deflator. Then we obviously go in the run-in Thursday, Christmas Eve, is usually a shortened trading session. Friday is Christmas, and then Boxing Day, US markets are normally open, but UK mainland Europe markets are normally closed in observance of that holiday. As far as my coverage doing these briefings, they'll be as per normal today, Tuesday, Wednesday. Amplify is also going to be putting out its outlooks for the forex, equity, and commodity market each day on those first 3 days of the week. So keep an eye out for that. And yeah, that's about it for the, for the briefing at the moment. So once again, I wish everyone the very best for the moment. Stay safe, stay positive, and I will see you in the Amplify Live chat room. All right, thanks very much, guys. Take care.