European markets underwent a lacklustre start to the week, following on from Asia markets, after China reported its first Covid related deaths since April, prompting broad risk off weakness across markets as well as a sell-off in crude oil over demand concerns.

Prices in Brent crude weren’t helped by reports that Saudi Arabia supported the idea of a production increase, sending Brent prices to their lowest levels since January, a claim that was subsequently denied after European markets had closed, pulling crude prices off their lows of the day.

US markets also slipped back weighed down by a strong move higher in the US dollar which appeared to be a reaction to the deterioration of sentiment in China as well as some follow through from last week’s comments from St. Louis Fed President James Bullard about a higher terminal rate being needed if inflationary pressures remained high.

Bullard’s view still seems to be somewhat of an outlier with the likes of Loretta Mester of the Cleveland Fed open to the idea of a 50bps rate hike in December, while Mary Daly of the San Francisco Fed expressed concern about policy lags and the risk of doing too much, although she was careful not to box herself in when it comes to options, keeping the 5% option open.

As we look ahead to today’s European open the sharp recovery in oil prices from their lows yesterday looks set to translate into a slightly firmer open, with the main focus set to be on the latest set of UK public finances numbers while the OECD is set to publish its latest set of economic outlooks.

In September UK public sector borrowing rose by more than expected to £20bn, with the recent increase in interest rates attributing to around £7bn of that. The sharp rise in interest costs has prompted some concern over the sustainability of UK public finances, especially given the volatility seen in gilt markets at the end of September after the infamous mini-budget.

While last week’s budget appeared to be designed to shore up market confidence, there is concern that some of the measures announced could well make matters worse from an economic recovery point of view, if the measures hobble the ability of the UK economy to rebound from the current contraction, we’ve seen during Q3.

It was notable that markets took exception to some of the measures in the September budget, it certainly didn’t mean that the alternative is a clamp down on spending and investment programs, in an attempt to reimpose austerity.  

Today’s October numbers are unlikely to be an improvement on the September numbers, simply due to the sharp rise in yields that we saw in the aftermath of the gilt market volatility. Expectations are for an increase to £21.5bn.

EUR/USD – currently capped at the 1.0400 and the 200-day SMA area, with the risk of a return to the 1.0180 area. A close above 1.0430 is needed to push up towards the 1.0600 area. A break of support at the 1.0180 area retargets parity. 

GBP/USD – still have resistance up near the 1.1960 level, and looks set to slip back towards the 1.1650 area. The 1.2030 area remains the broader resistance. This is likely to be a huge barrier for any further gains. A break of support back at the 1.1640/50 area sees risk of the 1.1500 area.

EUR/GBP – the 100-day SMA is the next key support just above the 0.8610 area. Resistance remains back at the 0.8780 area, with range resistance at the 0.8820 level.

USD/JPY – moved through the 141.00 area, and looks set to retest the 142.50 area. A move back above 142.50 opens up a return to the 145.00 area. Support now comes in at the 140.30 area.

FTSE100 is expected to open 24 points higher at 7,400

DAX is expected to open 12 points higher at 14,392

CAC40 is expected to open 16 points higher at 6,650