...at least for now anyway!
Monday marked the worst sell-off for European equities since June as fears of new lockdowns swept markets. Commodities also dropped, while in FX, risk-sensitive emerging market currencies and commodity dollars took the brunt of the sell-off, while the likes of the pound and the euro were also hammered. At the start of Tuesday’s session, the markets have stabilised somewhat, but it remains to be seen whether this is just a pause before more selling resumes, or whether the bulls have once again shrugged off virus concerns and bought this latest dip in risky assets.
Whatever happens in the next few days, I am of the view that this time around, we won’t see a March-style sell-off and I reckon the sell-off, especially for European stocks relative to the overvalued US markets, as well as precious metals, could be limited. Things are a lot different than the first round of the infection. It looks like there is greater immunity in Europe, with death rates remaining very low even as cases have spiked. There are also a few treatments for severe cases, while scientists are now hopefully on the verge of finding effective vaccines.
Obviously, the markets care more about the economic impact of the pandemic in terms of new lockdowns, rather than the pandemic itself. But governments have resisted introducing sweeping lockdown measures so far in this second wave of infections. This should have limited impact on the recovery, assuming the measures will get relaxed again as soon as the R comes down.
It is also worth remembering that central banks and, to a lesser degree, governments will be ready to provide more support if needed. With central bank QE programmes running at full throttle, there is plenty of liquidity in the financial markets, which could soon find their way in downbeat stocks and some of the other assets that sold off on Monday, chiefly precious metals. The dollar could resume lower if that happens, proving support for major currency pairs again.
Meanwhile it is set to be a quiet day for data, but we do have Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin testifying on pandemic relief, later on. Powell will warn that the economic outlook will remain highly uncertain, but what the markets will want to know is whether he and his FOMC colleagues will do anything about it, by providing more stimulus. On a micro front, investors will be watching the highly-anticipated "Battery Day" event from Tesla, which is expected to showcase the firm’s new innovations in batteries and battery-powered vehicles.
