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COVID-19 is out of control, and so is the stock market

Hussein Sayed, Chief Market Strategist at FXTM, shares insights on how a new wave of COVID-19 cases is impacting international stock markets.

At the beginning of the week, we warned of a possible volatility spike and turbulence in financial markets with only a couple of days remaining to the US presidential election However, Wednesday turned out to be an ugly one for investors and much worse than expected Technology stocks were hit the hardest falling 4.38%, followed by Energy and Industrials which declined 4.18% and 3.47% respectively

At the beginning of the week, we warned of a possible volatility spike and turbulence in financial markets with only a couple of days remaining to the US presidential election. However, Wednesday turned out to be an ugly one for investors and much worse than expected. The S&P 500 plunged 3.5% in its biggest drop since June, with all sectors falling more than 2%. Technology stocks were hit the hardest falling 4.38%, followed by Energy and Industrials which declined 4.18% and 3.47% respectively. Those seeking to protect their portfolios through put options are now finding it much more expensive, with the VIX index closing above 40 for the first time since 11 June.

While US election uncertainty remains a considerable factor impacting risk assets, the selloff this time was driven by fears the pandemic is entering a new phase. The US, Italy, Spain and many other nations are seeing new daily records of Covid-19 infections and hospitals are filling up at a very fast pace. Over the past several days it has become evident that the virus is becoming out of control and the only way to fight back is through new lockdowns. France have already announced a second national lockdown until at least the end of November and Germany will impose an emergency lockdown which includes the closure of restaurants, gyms and theatres. As a result, the German Dax and French CAC fell 4.17% and 3.37% respectively.

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US futures indices are currently indicating a rebound of more than 1% after yesterday’s sharp selloff, but that can be put down to bargain buying rather than a shift in fundamentals. Expect volatility to remain elevated for the next several days.

With another stimulus package dead and buried for the time being, US consumers who are the biggest driver of the economy will have more reasons not to spend, especially if new State lockdowns emerge leading to more job firing. Today’s Q3 GDP report is expected to show a 31% increase in real growth but given that analyst estimates range from 8% to 37.1%, there is room for surprise. Although this data is a lagging indicator, it can still lead to big market moves if it deviates largely from expectations. It will require a significant positive surprise to encourage investors to buy the dips, especially given that Q4 doesn’t look promising with the latest developments.

With the chances of a double dip on the rise, the European Central Bank is under more pressure to act given that several countries are undergoing new lockdowns and there still doesn’t seem to be any cohesive fiscal response to the pandemic. We are expecting the central bank to hold fire for now and set expectations for December easing, but given the fast pace of deterioration in the region we cannot rule out the announcement of new easing measures. The Euro remains under significant pressure whatever the outcome from the ECB meeting today. However, if a new easing package is announced, we are likely to see EURUSD drop towards the 1.15 – 1.16 range.

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