Is it time to batten down the hatches for COVID 2.0?

Get Minerva Analysis' view on what the market sell off says about the future for markets, and why a fresh high in gold is looking increasingly likely. 

Indices are a sea of red today, as global stocks sell off around the world. The gold price is at a record high and it seems that reaching the milestone $1,800 an ounce level is a mere matter of time. So, is this the start of another sell off? Will there be bouts of volatility throughout the summer months, and less than 24 hours after the Nasdaq reached another record high, are stock prices past their peak? 

The answer to all of those questions could be yes, financial markets are more nervous than they were on Tuesday; we can measure this using the Vix index, which was a fairly chilled 29 yesterday before surging to 34.5 just as US markets opened, it has since returned to the 33 level. Market jitters are coming on the back of a trifecta of problems that are disrupting the bulls’ narrative of ‘buy everything’. Firstly, coronavirus cases are surging, India has reported its largest number of new cases in one day, there is also a fresh surge of infections in US states that have recently eased their lockdown measures. Texas, Florida and Arizona are all witnessing a wave of new cases. The US’s top infectious disease expert, Dr Anthony Fauci, has said that the next few days will be critical for the US to stem another wave of coronavirus. The heat is on, if President Trump continues to enforce his blasé attitude to the pandemic then market jitters could steadily increase, knocking stock prices even further. Rightly or wrongly, stock markets and other risky assets could cope with a surge of cases in the less developed world, however, a fresh wave of cases in the US, which ended lockdown much earlier than other European countries, could trigger more risk-averse behaviour from financial markets. 

Why we are better prepared for a second wave 

But there could be some reasons to remain optimistic. Fresh waves of the virus in Germany could also be adding to market nerves, however, the German government has taken swift measures to lockdown local areas and stop the infection rate spreading across the country. If this is proven to be successful (we should know in a couple of weeks), then we believe that the markets may make peace with fresh outbreaks of the virus. UK Prime Minister Boris Johnson has said that localised lockdowns could also take place in England, if we see another wave of cases here. The reality for anyone trading financial markets is that second waves and fresh outbreaks of coronavirus will happen, the virus is still with us and there is no vaccine. However, governments and public health bodies have had nearly 6 months to prepare for future outbreaks, thus, mandatory mask-wearing and localised lockdowns could be the medicine for future outbreaks, rather than mass suppression of economic growth, which should protect financial markets from February-like sell offs in the future. 

The US vs. the rest of the world 

The second factor that is impacting financial markets as we move into the latter part of the week is rising global trade tensions. Already this week the markets have swooned over the prospect of the trade deal between the US and China being over, this was denied by President Trump himself on Tuesday. However, protectionist trade policies are back in the limelight as the US lines up $3.1bn of trade tariffs on European goods, including German camera lenses, French wine and British biscuits and Scotch whiskey. The EU and America are in a dispute over aircraft subsidies, which has seen the World Trade Organisation get involved. The new tariffs on 30 different European goods are in the consultation stage, and the comment period will last until July 26, however, the last thing that the market needs right now is another trade war, especially between the US and the EU. This would be bad news for the GBP, in our view, as the UK plays hardball as we try to negotiate a trade deal with the EU before the end of the year. If the EU is preoccupied with a dispute with the US, then time could run out to get trade deal that both the EU and UK can agree on. GBP/USD is down approx. 0.5% on Wednesday and is one of the weakest performers in the G10. This may be reflective of growing trade tensions between the US and the EU and could spell more weakness to come for the pound. 

The delicate balancing act 

Lastly, while the economic data this week has been better than expected, the manufacturing PMI came in above 50 for June, there remains risks. The recovery in economic activity comes at a cost of higher infection rates around the world, which have now reached more than 9 million cases. For now, it appears that most governments are willing to take that risk, however, if there is a significant increase in the death rates in the major economies or if hospitals in the UK, US or parts of Europe are overwhelmed by a second wave of coronavirus then future lockdowns cannot be ruled out. Thus, we remain in uncertain territory, and without a vaccine financial markets will need to learn to live with this uncertainty, and future pockets of financial market volatility cannot be ruled out. Thus, while there are signs that economic activity is recovering faster than expected, it is worth heeding the warnings from the medical community, as ultimately it is a virus that is dominating financial markets in 2020. It is also the reason why headlines such as the outbreak of the virus at Novak Djokovic’s Adria tennis tour also has the potential to cause a shiver down traders’ spines as it is a keen reminder that the virus remains a clear and present danger. It is also the reason why the gold price has continued to move higher in line with a record-breaking recovery rally for US stocks. We believe that life above $1,800 for the gold price is inevitable while we don’t have a vaccine for coronavirus.