After falling sharply this morning, European stocks and US futures continued their meltdown ahead of the open on Wall Street, causing the US dollar to rise which hurt everything priced in USD, even gold. The sell-off in Europe has now extended for the third session, and even a stronger earnings report from Microsoft was not been enough to keep Nasdaq futures in the positive territory. At the time of writing, the German DAX was off by more than 3%, adding to its recent big falls, while the other European indices were about 2.5% worse off. US index futures were between 1.5 to 1.7 percent lower, holding near their lows. Among commodities, US crude oil prices were off by 3% and gold was down 1.4%, while copper was also well in the negative territory.
So why is everything selling off?
Well, the fact that there won’t be any fiscal stimulus package before the US election is out of the way, is one of the reasons.
But more to the point, it is the rising levels of virus infections and deaths, resulting in tougher restrictions and lockdowns. This in turn has revived worries about the economic impact of the pandemic, just when things were starting to look positive. Investors are forced to re-assess their optimistic projections on growth and are thus reducing their risk exposures accordingly.
Short-selling is undoubtedly adding to the pressure as opportunistic short-term focused traders move to take advantage of the volatility.
Night curfews were already in force in several European countries, but this has failed to halt social interactions significantly and the virus has continued to spread, causing deaths to rise. France for example recorded 523 deaths on Tuesday. Consequently, governments are planning to ramp up restrictions further, and this is worrying for investors as it may mean a complete halt to the economic recovery.
In France, the government is expected to announce a four-week lockdown later this evening, although it is not clear whether schools will shut. Germany too is expected to tighten its restrictions on movement and contact, by closing bars, restaurants, gyms and other nonessential businesses through the end of November. We have already seen the likes of Italy and Spain impose their toughest nationwide restrictions since the end of lockdown.
Meanwhile, the virus continues to spread like wildfires. The Czech Republic and Poland have suffered new records in daily cases, while in the US cases in Texas saw their biggest jump in 2 months. Other US states are also reporting similarly sharp rises in infections.
Is there any hope?
Yes – vaccines. However, this is a slightly longer-term consideration. There are also concerns over the effectiveness of the potential vaccines under development, while some experts worry that they won’t become available soon enough to prevent further sharp rises in deaths. The longer the delay, the more uncertainty there will be, meaning the markets will likely remain volatile. However, if and when a vaccine or vaccines become available, I would think that would then boost confidence and lead to buying of risk assets again by investors.
What will ECB do?
In the meantime, governments and central banks could step in to halt the decline by announcing more stimulus. With lockdowns rising, the pressure will be on the ECB, meeting on Thursday, to deliver more stimulus. However, analysts are not expecting the central bank to announce a policy change until its December meeting. But in light of the fast-deteriorating virus situation – and the falls in the European stock markets – acting now rather than later may make more sense. Why wait until things get really bad, if you are planning to provide more support in two months’ time anyway?
CAC on watch as Macron set to announce month-long lockdown for France
With the French government set to announce new restrictions, and the ECB meeting to look forward to on Thursday, the French CAC is therefore an index that needs to be monitored closely. With the breakdown of several key levels, the path of least resistance is unquestionably to the downside. But will the ECB provide a surprise announcement? If it does, we may see at least a temporary halt in the slide.
Source: ThinkMarkets and TradingView.com