Persistent bad news on coronavirus cases and mounting trade tensions on White House’s plans to impose $3.1 new tariffs on European and British imports battered the market mood and brought investors to realize profits and walk away.
The IMF downgraded its outlook for the world economy, predicting a 5.4% contraction in global GDP this year, and a softer rebound in growth in 2021 pointing at a larger than expected supply shock during the early weeks of the lockdown and at a prolonged impact from the social distancing and other virus containment measures to the economy.
Meanwhile, cases in Florida and California rose by record and the WHO warned that South America hasn’t reached a peak yet, despite 25% to 50% rise in cases during the past week.
To make things worse, the US officials announced their plan to impose tariffs on $3.1 billion worth European and British goods. Rising risk of renewed trade tensions brought investors to scale back their recovery prospects for Europe, while Germany imposed new quarantine measures to halt a potential second wave contamination.
On the data front, the US GDP read will likely confirm a 5% contraction in the first quarter today, but the May durable goods orders should print a 10% jump in May on the back of business reopenings and improved economic activity after weeks of lockdown.
Still, investors are caught between a rock and a hard place on the back a rapidly rising flow of bad global news and thin summer liquidity makes the trading conditions choppier.
The DAX and the FTSE bled more than 3% on Wednesday and all sectors slid in S&P500 (-2.59%), the Dow fell 2.72% as Nasdaq slipped 2.19% from its all-time high in New York.
Asian stocks joined the sell-off, though losses across the major Asian indices remained softer as China was closed for bank holiday. The Nikkei slid 1.10% and the ASX lost 2.08% on lower oil prices.
Losses in European and US futures remained timid in the overnight trading session, but there is a chance that the sell-off gains momentum on the back of dashed recovery prospects.
We will likely see a deeper downside correction across the major equity indices, though we believe that the expectation of further fiscal and monetary stimulus should come to the rescue before the market turns into a bloodbath.
But now it’s time for safety. The US dollar is better bid across the board and the US yields ease on the back of a swift move to safe haven assets. Demand in yen and Swiss franc remains solid.
By Ipek Ozkardeskaya
