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.
