The main reason behind today’s sell-off is concerns over a second wave of infections. For investors, it all about the economic damage that a potential second wave could cause, rather than merely concerns over more cases and deaths.
Stocks extended their losses at the London open after index futures had gapped lower overnight as fears over a second wave of infections intensified. The indices then trimmed their losses by mid-morning with the DAX recovering from around -3% to -1.5% on the day and similar price action were seen for other European indices and US index futures.
Source: TradingView and ThinkMarkets
But sentiment remained downbeat despite the inducing bouncing off the lows, with traders looking forward to the open on Wall Street for new direction. In FX, the Dollar Index edged higher, with the greenback in demand due to the ongoing “risk off” trade. Risk-sensitive commodity dollars were understandably leading the falls. Crude oil dropped but like the indices it managed to bounce off the lows. Gold also fell sharply as the dollar rose, with the precious metal again faltering around that key $1745 resistance level which it failed to break last week despite looking promising at one point.
Economic damage from second coronavirus wave damage may not be as severe
The main reason behind today’s sell-off is concerns over a second wave of infections. For investors, it all about the economic damage that a potential second wave could cause, rather than merely concerns over more cases and deaths. The key question is whether we will see the same parabolic rise in cases that will almost definitely require widespread lockdown measures again, or merely local hotspots that require local lockdowns. Going into lockdown again would be catastrophic in terms of economic damage, with many economies limping following the first round of lockdowns.
Investors more inclined to buy the dip?
The key difference this time of course is that people are more aware of social distancing rules to make the required adjustments. So, hopefully, the spread of new infections will be controlled more effectively, allowing businesses to remain open. Investors may therefore be more inclined to buy the dip this time around, especially with all the central bank stimulus providing support. However, timing is key. Traders will need to see a confirmed reversal signal on the charts of the major indices before potentially stepping in on the long side again. For now, price action suggests the bears are in control, as the indices test key technical support levels.
Covid-19 returns to Beijing
The sell-off comes after an outbreak of nearly 100 coronavirus cases were reported in Beijing and a spike in some US states raised fears of a resurgence of the pandemic last week. It is especially worrying as many economies have eased their lockdown measures further with stores in the U.K. selling non-essential items, for example, reopening today following the worst contraction in GDP in April and signs of a very weak recovery since. France and several other European nations have or will re-open their borders for travellers from the European Union. In the U.K., visitors will have to self-isolate for 14 days.
So, travel restricts are easing here but it remains to be seen whether and how new Covid-19 cases will spike with more people crossing the borders. Indeed, the easing of lockdown measures haven’t been so successful in some places, especially the US and India. Infections are surging in India, with nearly one in three people who have tested for Covid-19 in Delhi this week were found to be positive. In the US, the southern states of Texas and Florida have seen infections spiking, while in New York Governor Andrew Cumo has threatened to reverse re-opening plans.
Poor Chinese data adds to risk off
Adding to the risk off sentiment, Chinese data overnight turned out to be weaker than expected, raising fears over demand. Industrial production rose 4.4% y/y in May when it was expected to rise 5.0% from 3.9% the month before, while retail sales dropped 2.8% y/y vs. 2.3% expected and following a 7.5% plunge the month before.
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