What Europe’s Covid-19 Second-wave Means for Markets
European Covid-19 cases have been rapidly on the rise over the last few weeks. In Spain, France and the Netherlands, new cases have risen sharply back to above April. Likewise, cases being reported each day in the UK are back to levels not seen since early May.
Travel restrictions continue to tighten on the continent, while lockdown measures are gradually being reintroduced, though this time rather than being aimed at pretty much stopping people from even leaving their houses (tantamount to economic suicide), new lockdown measures are being aimed at stopping inter-household socialising.
For example, numerous European countries have restricted the amount of time that bars and restaurants may stay open for, while in the UK, groups of six are no longer allowed to meet up, be that in a private or public setting.
This seems to be the new norm; rather than stopping people from going to work, the aim now to curb the virus will be to stop people from socialising. This makes sense given that 1) evidence points to inter-household social gatherings as being the most common mode of spread of the virus (rather than say being on public transport or at a well socially distanced workplace) and 2) most countries can’t afford another lockdown like the first one (i.e. they cannot afford to support furloughed people’s wages and people cannot afford to stop working).
So what does this mean for the market?
Well, judging by today’s price action (European and US stocks getting slammed, crude oil markets also getting wholloped and in FX markets, USD and JPY rallying hard while risk FX such as NOK, AUD and NZD all getting crushed), it is not going to be good!
Indeed, though the coming round of lockdown-lite in Europe and elsewhere (Chinese officials reportedly think a second wave is “inevitable”) won’t be as devastating as the full lockdowns were back in Q2, but they will still weigh on economic activity by 1) discouraging consumer spending and 2) discouraging business investment, both as a result of higher levels of uncertainty about the future (consumers will opt to save more “just in case”, and business will not want to commit as strong to future products).
That not even taking into account the impact of virus fears that will naturally play their part in keeping consumer’s feeling cautious about fully engaging with society.
So ahead, in Europe in particular, it looks as though the economic recovery from the first lockdown is set to stall further. That may translate into a stalling global recovery.
That is ought to be a negative for risk assets (stocks, AUD, NZD, CAD and crude oil) and a positive for havens such as USD and JPY (and bonds).
Pretty much, today’s nasty dumping of risk assets might be a taste of more to come…
Our fundamental course, helps anyone understand them, all curriculum is very much fun, informative and packed with much energy. It will help you transition into an all-round trader, implementing fundamental and technicals to provide the edge when trading.