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SInvestors in the tock market are set for a bumpy ride this week as the likelihood of further dramatic increases in Covid-19 cases across the world collides with the final days of the US presidential election campaign.
Last week, stocks in the United States and Europe fell at their fastest pace since March and analysts said there would be worse to come, after France and Germany imposed strict lockdowns and that US states have come under pressure to tackle the rising death toll.
“New lockdowns across Europe are being harshly reassessed by markets,” said Emmanuel Cau, equity strategist at Barclays.
“There is enormous nervousness about a second wave,” added Gabriel Sterne, head of global macroeconomic research at the consultancy firm Oxford Economics. “As some public finances start to be strained, the threat of further lockdowns is causing great anxiety.
Heightened levels of concern about the trajectory of the virus began to affect markets three weeks ago. From New York to Paris, London and Tokyo, investors sold in massive numbers from October 13, with each day bringing news of higher infection rates and growing numbers of deaths.
Stricter measures to limit household mixing have started to take effect and government ministers of all political stripes have started talking about wider lockdowns being the only answer to the spread of the virus.
The Paris CAC index fell more than 400 points, or 8%, from October 13 to the end of last week, while London’s top 100 listed companies fell 7.5% over the same period. Last week, the Stoxx 600 index of European companies fell to its lowest level in five months, falling 3.1% in one day.
In the United States, a decline in stock values that began in September with panic over the virus turned into a rout after it became clear Congress would not give Donald Trump the stimulus package he dreamed of .
Without a second installment of $ trillion in cash to support closed businesses and millions of unemployed, the president’s boast that the recovery was “fantastic” lacked substance. The S&P 500 lost more than 8% in the 16 days after October 13.
It wasn’t the first time this year that fears of a second wave of Covid-19 had spooked markets, but the rallies that turned previous panics into mere chart failures appear to be absent this time. Investors stopped listening to hopeful stories about a vaccine and began to examine the ripple effect that comes from the widespread adoption of masks and physical distancing.
As Dhaval Joshi, chief European strategist at BCA Research, says, consumers who cannot use their noses or mouths near others are hardly consumers at all.
He estimates that if the lockdowns temporarily block economic activity, the face mask and distancing rules will reduce by up to 10% of GDP as long as they are imposed. transport – have taken a beating since March.
However, investors who have turned to the tech industry have ignored concerns about the virus. The big tech companies – Apple, Amazon, Alphabet (the owner of Google), Microsoft and Facebook – were behind the 50% increase in the S&P 500 since Trump took over the presidency and have generally benefited from the shift to a more digital economy since the lockdowns in March. If US stocks are to regain momentum, technology will have to perform.
In the UK, where the FTSE 100 is dominated by banks, insurance companies, and oil and gas companies, stock prices barely recovered after falling to 5,000 points in March. Across Europe, successful industrial giants such as Mercedes-Benz, Volkswagen and Siemens were hit by a six-month rally in their stock prices that took a negative turn.
Donald Trump’s attack lines in the final weeks of the US presidential campaign also highlighted the potential downside for investors of a victory for Democratic candidate Joe Biden on November 3. Desperate to land a few punches on his rival, the president has repeatedly tweeted, “A vote for Joe Biden is a vote for the biggest tax hike in history.”
So far, the claim, which even right-wing American think tanks say overstates the scale of its tax proposals, has failed to change the polls and they continue to suggest a victory for Biden. But distrust of the polls and Trump’s veiled threats to challenge the validity of a narrow Biden victory have only added to the nervousness of the stock markets.
Central bank actions are a constant source of light for investors. After a brief flirtation by the US Federal Reserve with rising interest rates in the early years of the Trump administration, all central banks reduced their borrowing costs to zero, and some, including the central bank European Union (ECB) and the Bank of Japan, at below zero.
Central banks have also injected billions of billions into the financial system to keep the flow of credit easy to businesses large and small, adding to the feeling that whatever Covid-19 may throw at them, the borrowing costs for businesses will be negligible. .
This week, the Bank of England’s Monetary Policy Committee is expected to add an additional £ 100bn to the £ 745bn of ‘quantitative easing’ – the purchase of sovereign and corporate debt from financial institutions – that it has already injected into the economy. The US Fed’s board of directors will also meet this week and signs are that the recent drop in stock values will persuade its policymakers to increase its current QE by $ 7.2 billion (£ 5.6 billion). .
Last week, ECB President Christine Lagarde signaled new momentum for the euro area in December, while the Bank of Japan said its determination to print as much money as it takes to keep the interest rate below zero was “unlimited”.
Such support from central banks will be essential as the virus continues to ravage people in Europe and the United States. Whether this is enough to put the stock market on a more positive course is another question.
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