Worst nightmare becomes reality

Hind Al Soulia - Riyadh - By Ipek Ozkardeskaya

GENEVA — Investors’ worst nightmare becomes reality with news of a second wave of contagion hitting the wires in the US. According to Bloomberg, Florida reported the highest number of new cases in a week and hospitalizations in Texas surged by a record 6.3%. Meanwhile, the WHO warned that the persistent rise in Latin America is a cause for concern.

If investors start jumpshipping on news that a second wave would lead to another period of confinement and economic shutdown, then the global stock markets would be hit by another wave of a severe sell-off.

This time, however, the dip could be limited as those who regret being too skeptical regarding the Federal Reserve’s (Fed) capacity to resuscitate the market and missed the latest rally, would probably take the second chance to join the party without too much hesitation.

In this respect, the Fed announced yesterday that the near-zero rates and white check for asset purchases would be kept at least through 2022. For now, the Fed will continue buying $80 billion in US treasuries and $40 billion in mortgage backed securities per month.

On the fiscal leg, Steve Mnuchin said that more fiscal stimulus is needed for retail, travel and leisure. There is no doubt, the winning fiscal-monetary duo will be there for consolation in case of a renewed risk sell-off.

The World Bank said the global economy may shrink 6% this year, and 7.6% in case of a renewed contagion.

Bad news brought the equity-bulls back on earth. US equities edged lower on Wednesday; the Dow (-1.26%) and the S&P500 (-1.05%) traded lower from their fifteen-week highs. Nasdaq (-0.55%) was offered less aggressively, as technology stocks would be a good hedge if the market sell-off intensifies.

Activity in DAX (-1.76%) and FTSE futures (-1.46%) hints at a bearish trading session in Europe. Energy stocks and financials could be on the chopping block on rising anxiety that the post-COVID recovery may not be as smooth as hoped, although European investors maintain hope that the old continent would be spared from a second wave of contagion.

The US dollar index jumped in Asia after hitting the 96-support, as the US 10-year yield retreated to 0.70% on the back of a swift move to safety. The USDJPY slumped below 107.00, as the Swiss franc traded at its strongest level since March as investors moved capital towards safe-haven currencies.

Gold remained bid above $1,700 per oz, but the upside potential remained limited as investors demand more evidence of a sizeable market rout to carry the gold rally toward the $1,800 mark.

WTI crude remained offered below $40 per barrel on rising anxiety of a renewed surge in Covid-19 cases and the unexpected rise in US oil inventories last week.

The EURUSD advanced to 1.1422 on Wednesday, but an important deterioration in global risk sentiment may rise the USD appetite and hinder the euro’s rally near the 1.15 mark. Today’s Eurogroup meeting will give an opportunity to European nations to express their view on the European Council’s latest proposal of 750-billion-euro recovery plan.

While there is a risk of opposition from the ‘Frugal Five’, European leaders are expected to agree on a rescue package of at least 500 billion euro as proposed earlier by Germany and France, to give a boost to the slaughtered European economy.

If this is the case, Europe will be a step closer to materializing a sizable fiscal boost, which should rise the hope of a softer post-COVID recession and improve the sentiment in euro. If the proposal hits a strong opposition however, the euro will likely give back its recent gains.

The sterling’s advance above the 200-day moving average (1.2730) against the greenback has certainly given an opportunity for easy returns to top sellers. The GBPUSD bounced determinedly lower after trading above the 1.28 mark. We expect a deeper downside correction towards the 100-day moving average (1.2475).

— The writer is senior analyst at Swissquote Bank