Rising number of coronavirus cases is making markets nervous

Rising number of coronavirus cases is making markets nervous

The World Health Organization (WHO) is warning of a possible second wave of coronavirus. Regional hotspots have recently emerged, with the US in particular seeing a sharp increase in new cases of infection. This is fuelling significant volatility in the financial markets, but the negative impact has been limited so far.

Virologists have been explicitly warning for some time of the risk of a second wave of infection. They say that the number of cases is particularly likely to go up again in the autumn. Summer has only just begun, but the plethora of bad news is raising fears that a return to restrictions on public life – at least locally – is on the cards. This has unnerved the capital markets in recent days. Investors appeared less willing to take on risk and collected profits in both the equity and the bond markets. The oil price came under pressure. Conversely, ‘safe havens’ such as German Bunds and US Treasuries made price gains.

This was triggered by a number of virus-related bad news stories. The numbers in the US look particularly worrying, with the number of new infections now higher than the peaks in March and April. The virus reached the US later than Asia and Europe. Poor healthcare provision and hesitant implementation of containment measures resulted in a rapid rise in cases. The ‘America first’ slogan quickly become applicable to the list of worst-affected countries worldwide. The economic fallout of the subsequent lockdown is substantial and resulted in a huge amount of dissatisfaction among the population. US President Trump took the side of demonstrators and demanded – not entirely altruistically – that the restrictions previously decided upon be eased rapidly. A high unemployment rate would be too great an obstacle for his re-election hopes. Consequently, restrictions were lifted relatively early on, even though the number of infections was still very high.

Will the second coronavirus wave arrive much sooner than the autumn?

Number of new infections in the US is rising rapidly
Will the second coronavirus wave arrive much sooner than the autumn?
Source: Bloomberg, as at 24 June 2020.

This was a game of high stakes, and it seems that the price is now being paid. In the week beginning 22 June, the three most populous US states (California, Texas and Florida) each recorded a record rise in new coronavirus cases. On 24 June, there were reports that intensive care beds in the Texan capital Houston had reached 97 per cent capacity. In response, the state of New York issued a ban on people arriving from southern states. But the authorities were not the only ones to implement restrictions, with companies reacting too. Walt Disney postponed the reopening of its theme parks in California, while Apple has recently closed 32 shops in southern states as a precautionary measure.

The US is not the only place where local hotspots have emerged. Cases of coronavirus are rising again in a number of cities in Japan, China and South Korea.

A countermovement materialised in the markets when the Governor of Texas spoke on television about sufficient intensive care capacity. He also said that the planned easing of lockdown measures would be delayed. It was noticeable, however, that politicians are finding it difficult to decide on new restrictions.

The latest events make it clear that coronavirus has slightly eased its grip on the markets but is still triggering bouts of heightened volatility. Latin America, particularly Brazil, Chile and Peru, certainly remain the epicentre of the virus. However, countries such as the US and UK are running the risk of forfeiting the progress they have made so far. There has been some positive economic news of late, with many signs of stabilisation emerging worldwide. Moreover, monetary and fiscal policy is providing huge support. However, pre-crisis conditions are unlikely to return until 2022 at the earliest.

 

As at 29 June 2020.