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Written by: Craig Erlam | OANDA
Europe has turned red on Friday as a new lockdown in Austria and the prospect of similar action in Germany wiped out earlier gains and forced stock markets down close to 1%.
The euro is also falling at the end of the week following the announcement that Austria will begin a 20-day full Covid-19 lockdown from Monday in response to surging case numbers which have far surpassed last year's peak. While fatalities remains well below the peak, they are accelerating and the government is clearly keen to arrest it before the situation potentially becomes much worse.
With Germany seeing a similar trend, the question now becomes whether the regions largest economy will follow the same path. Its Health Minister, Jens Spahn, today suggested nothing can be ruled out and that they are in a national emergency.
The situation is not quite so severe in other countries like France, Italy and Spain but that could change in the coming weeks, as we saw around the same time last year. High vaccination rates mean the link between case numbers and fatalities is far lower but the former is rising at a remarkable rate which is clearly making it very hard to ignore.
UK retail sales nothing to get excited about
There was a positive surprise in the UK retail sales report for October, as volumes rose 0.8%, driven by a 4.2% jump in non-food store purchases. While I would like to believe that we're seeing the return of the UK consumer after five consecutive months of falling sales, it's hard to put this down to anything other than early Christmas shopping, with sales being lifted by big increases in areas such as clothing and toy retailers.
The prospect of festive shortages is on everyone's mind and it's inevitable that many will therefore look to get ahead rather than risk empty shelves and disappointed children next month. I imagine we'll see this reflected in the November and December numbers.
That's not to say we can't see the return of the consumer which would be huge for an economy so dependent on them. But they have been very cautious for most of the year, as evidenced by the weak consumer sentiment data and higher than average savings rate. And with inflation rising, certain pandemic benefits ending and taxes rising next year, I struggle to see those attitudes suddenly improving. It seems traders agree as the pound edged higher before giving most back shortly after.
Oil correction could deepen in coming weeks
Brent crudes brief dip below $80 was short-lived on Thursday and prices were continuing to recover on the final trading day of the week until Austria announced its lockdown. Brent crude quickly reversed course and trades almost 2% lower on the day as it takes another run at $80.
Oil has been declining over the last week as demand forecasts have been pared back, OPEC and the IEA have warned of oversupply in the coming months and the US has attempted to coordinate an SPR release with China and others.
The market still remains fundamentally in a good position but lockdowns are now an obvious risk to this if other countries follow Austria's lead. A move below $80 could deepen the correction, perhaps pulling the price back towards the mid-$70 region. This looks more likely now than it did a day ago and if Germany announces similar measures, it could be the catalyst for such a move. Perhaps OPEC+ knows what it's talking about after all.
Gold holding near highs on inflation concerns
Gold is continuing to consolidate between $1,850 and $1,875 after rallying strongly earlier this month. High inflation is continuing to support the yellow metal and is currently stopping this consolidation turning into more of a correction.
As it stands, a run towards $1,900 still looks likely as the trend remains bullish but a break below $1,850 could lead to a little more softness in the near term, with $1,833 key below here.
Inflation isn't going anywhere soon and it's continuing to suppress real yields and drive support for hedges. Higher rate expectations could address both of these and take the wind out of gold's sails but we may have to wait until the Fed meeting for that.
Gold did get a bump from the Austria lockdown announcement as well, especially when paired with the prospect of similar restrictions in Germany. It remains a little off its highs but could be a sign of things to come as we move into the winter.
Bitcoin dips will continue to attract interest
Bitcoin continued to slide on Thursday, falling below $58,000 where it saw strong support in late October. We may have just entered into a deeper correction, not that this will panic anyone. I'm sure there's plenty of bitcoin speculators rubbing their hands together at the prospect of catching some dips, such is the confidence out there in the space at the minute. How far it will fall is anyone's guess. A move back towards $50,000 would be interesting and, given its gains since the summer, no big deal. The dips will continue to attract plenty of interest.
Related: Feels Like 1977: Inflation Too High, Money Too Loose