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FTSE 100 collapses 3% as new COVID strain appears (again)

Today's massive bearish action brought bulls to their knees, sending equity indices to multi-month lows.

Sentiment deteriorated sharply Friday, sending all risky assets aggressively lower. EU bourses declined 3-4%, with the FTSE index down to two-month lows, testing the 200-day average and trading at around 7,100 GBP.

COVID news destroying longs

Late Thursday, the World Health Organization announced that it’s monitoring a new Covid-19 variant with “a large number of mutations,” detected mainly in southern Africa. Moreover, it could be resistant to vaccines.

The announcement caused a massive panic in the financial markets as it implies more lockdowns and restrictions are coming in the near future. Traders sold stocks, commodities and bought bonds and gold.

The UK has already suspended flights from six countries due to the new variant. As well as South Africa, Namibia, Lesotho, Eswatini, Zimbabwe, and Botswana are all included in the new restrictions.

Inevitably this will dampen sentiment generally until such time as the strength of the variant can be assessed and, in the meantime, further pressure is likely to track shares in the likes of the airline and hospitality sectors. With the ‘new normal’ yet to be established post-pandemic, the theme will continue to run for some time yet, Richard Hunter, head of markets at Interactive Investor, said.

However, today’s “bad news” might prove only short-lived and quickly forgotten, with the dip-buying strategy still performing well as long as the long-term uptrend remains intact.

From other news, Bank of England Chief Economist Huw Pill said that a resurgence of the pandemic would mean that the bank would have to be more cautious. There are risks on two sides for the economy, he added.

Elsewhere, on QE, Pill said that the idea that there would not be any run-off might be optimistic and he hoped any impact would be modest . Moreover, Pill noted that he hoped the UK could return to having a positive real interest rate.

The macro calendar is empty today, offering no macro news throughout the rest of the day. The main focus of investors will remain on the new COVID variant and the bearish sentiment might continue in the following hours.

Technical picture not so bullish anymore

The price has dropped to its 200-day moving average at around 7,040 GBP , but so far, bulls have managed to defend it. As long as the index trades above it, the medium-term ascending trend is still valid.

In case of a bearish breakdown, the next target would likely be at 6,800 GBP, where the previous double bottom pattern is seen.

Alternatively, if the mood improves and bulls reappear, we could see a rally toward 7,200 GBP. The index needs to climb above it to change the short-term outlook to bullish again.

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