Stocks tank on lockdown fears…

… but should we be more optimistic this time?

So, virus fears have come back to haunt investors today, as concern rise that the consumer-led recovery is going to falter if lockdowns are re-introduced. Stocks have tanked, the dollar has jumped, and the pound has been pounded. However, I reckon the sell-off for European stocks could be limited this time around, and there are reasons to be optimistic about the outlook.

European stocks fell sharply this morning, with the likes of the UK’s FTSE and Spain’s IBEX down by around 3.5%, while the German DAX was not far behind with a 3% drop. US index futures tracked EU indices and pointed to a big gap down at the open.
Owing to the big drop in stock prices, the safe-haven US dollar caught a bid against nearly all major and EM currencies, except the safe-haven yen.
Travel stocks, as well as the pound and euro were hurt as the fresh wave of virus cases across Western Europe raised fears that another lockdown could be forthcoming.
Banks slumped with HSBC down 6.5% on reports alleging this lender and Standard Chartered of moving illicit funds. HSBC was also reported to be a candidate for the Chinese government’s “unreliable entity list”.
There were almost 13,500 new cases in France and almost 14,400 in Spain on Saturday, the highest single-day total for both. In the UK, we have seen 4,422 new cases, which is the highest number since early May. As case counts seem to be increasing exponentially again, the crucial reproduction number – the R – has climbed in the range between 1.1 to 1.4.

While Covid-19 infections have been sharply rising across Western Europe, the good news is that death rates have not been anywhere as high as the first wave. In fact, death rates have continued to fall for the likes of the UK, Italy and Germany. As it is the death rate rather than infection rate that will likely prompt further government intervention, the likelihood for reintroduction of wide scale lockdowns are still quite low. Some new restrictions should be expected, but this may not necessarily lead to a slowdown in economic recovery as some fear. What investors will now want to focus on is to see whether there is a lag in deaths. But if death rates hopefully continue to remain low and do not catch up with the recent rises in infection rates, then investors might once again start loading up on stocks following the recent pullback.

In a nutshell, things are a lot different than the initial phase of the pandemic in terms of immunity, death rates and treatments. What’s more, scientists are now hopefully on the verge of finding effective vaccines. And let’s not forget about all the central bank and government stimulus money flooding the markets, with the potential for more.

Against this backdrop, there are good reasons to remain positive or investors.

For traders, though, what matters the most is momentum. Right now, the momentum is to the downside for the major indices, such as the DAX after it broke below its bullish trend line. This saw the losses accelerate as short-term-focused traders moved to take advantage of the downward momentum. This group of market participants will probably be quick to change bias and buy everything once the dust settles and the selling momentum fades. As the DAX and other indices are already down big today, I doubt we will see further sharp drops in the afternoon. But it will be interesting to see if any potential rally will be faded.