Europe heads lower as plunging lira and rising Coronavirus hit sentiment

Concerns over Germany extending lockdown restrictions, the UK pushing out its travel ban combined with the tanking Turkish lira set European bourses off on the back foot at the start of the week. Travel and banking stocks are leading the charge lower.

Occurrences in Turkey over the weekend have unnerved investors. President Erdoğan’s unexpected firing of the central bank governor sent a ripple of risk aversion across the financial markets.

Europe’s third wave

Concerns over a third wave of covid in Europe is dragging on risk sentiment. Last week, France announced it was reimposing lockdown restrictions as a third wave of covid spread. Germany’s Angela Merkel is also considering extending Germany’s lockdown for a fifth straight month as new daily infections rise. Quite simply, the longer economies remain shut, the longer economic recovery will take, and the deeper potential economic scarring from the pandemic could be.

The rise in infections in the old continent comes amid a sluggish vaccine programme and ongoing confusion in Europe over the safety of the AstraZeneca jab. While a report in the US revealed the AstraZeneca vaccine was 79% effective, works just as well in people both over and under 65 and under, and doesn’t increase the risk of blood clots, some countries in Europe are still refusing to resume use. The vaccine desperately needed some good press to boost the stock price, even if many Europeans remain rattled over its safety.

Travel & tourism stocks hit on UK travel restriction uncertainty

Over the weekend, British ministers made it clear that it was still too early to book holidays abroad, amid fears that holidaymakers would bring back vaccine-resistant covid variants to the UK. This news is a kick in the teeth for travel and tourism firms, which had been gearing up for a surge in demand this summer after an extremely challenging year. As such, travel and tourism stocks are dominating the lower reaches of the FTSE.

Commodity stocks are also tracing oil and metal prices lower, dragging on the FTSE and ensuring it underperforms its European rivals. The introduction of new anti-pollution measures in China sent iron ore futures sharply lower.

FX – Tank of the Turkish lira sparks safe-haven flows

Safe-haven flows are driving the FX markets after the Turkish lira collapsed, tanking 14% on the open. President Erdoğan’s sacking of hawkish central bank governor Naci Agbal shocked local and foreign investors, sending the lira plunging. Prior to today’s crumbling of the currency, the lira had been one of the best-performing emerging-market currencies so far this year, owing in part to Agbal’s long-needed tightening of monetary policy and prudent decision making.

Reflecting the risk-off mood, the safe-haven Japanese yen is advancing, and the US dollar also started the week on the front foot. However, the picture is improving as the new governor and finance minister pledge to keep monetary policy stable.

Attention will now turn to Federal Reserve Jerome Powell, who is due to testify before Congress with Treasury Secretary Janet Yellen. This will be the first of three appearances by the Fed chair this week. However, Powell’s appearance comes hot on the heels of the Fed monetary policy statement and press conference last week, so new market-moving information could be limited.

Oil extends losses on lockdown concerns

Oil prices resumed the sell-off on Monday, building on last week’s steep losses amid growing concerns over future demand as fresh lockdown restrictions are implemented in Europe.

France reimposed lockdown restrictions last week as a third wave of covid surged through the country. Germany is also due to see lockdown conditions extended into a fifth straight month. Rising cases combined with a sluggish vaccine programme in Europe highlight the challenges that remain in the fight against the virus. Oil demand is still a long way off pre-pandemic levels, and prices are currently being propped up by significant output cuts in place.

Data on Friday has added to oil’s woes, with the Baker Hughes rig count revealing an increase of nine rigs to 411. This is the highest number since April last year, as US drillers look to capitalise on the recent price spike.

The rig count is considered a useful guide to future production. As US driller numbers rise and OPEC+ looks to increase production from next month, oil could struggle to move much higher beyond its current levels.

Gold looks lower ahead of Powell

Gold is coming under pressure in early trade, despite the risk-off tone to the market and yields easing lower.

While the benchmark US 10-year treasury yield remains under 1.70%, gold buyers are still reluctant to place bullish trades ahead of Federal Reserve Chair Jerome Powell’s speech later today.

The technical picture favours sellers after gold failed to break above its descending trend line dating back to early January. Support is currently being tested at USD 1730, which is the 50 SMA on the four-hour chart. A break-through here could bring USD1700 into focus. On the flip side, any move higher would need to clear USD1745, which is the descending trend line, in order to target USD1755.