Markets plunge in uncertainty about a second term and a second wave

Stock market investors are braced for a bumpy ride this week as the likelihood of further dramatic increases in Covid-19 cases across the world collide with the final days of the US presidential election campaign.

Last week, shares in the US and Europe slumped at their fastest rate since March and analysts said there would be worse to come, after France and Germany imposed strict lockdowns and US states came under pressure to tackle the rising number of deaths.

“New lockdowns across Europe are being harshly repriced by markets,” said Barclays equity strategist Emmanuel Cau.

“There is a huge nervousness about a second wave,” added Gabriel Sterne, head of global macro research at consultancy Oxford Economics. “With some government finances beginning to be stretched, the threat of further lockdowns is causing a large degree of anxiety.”

Heightened levels of concern about the path of the virus began to affect markets three weeks ago. From New York to Paris, London and Tokyo, investors sold heavily from 13 October onwards as each day brought news of higher infection rates and growing numbers of deaths.

Stricter measures to limit households mingling began to take effect and government ministers of all political stripes began to talk about broader lockdowns being the only answer to the spread of the virus.

The Paris CAC index lost more than 400 points, or 8%, from 13 October to the end of last week while London’s top 100 listed companies slumped 7.5% over the same period. Last week, the Stoxx 600 index of European companies slumped to its lowest level in five months, falling 3.1% in a day.

In the US, a downturn in stock values that began in September with a panic over the virus turned into a rout after it became clear Congress would not give Donald Trump the stimulus package he craved.

Without a second trillion-dollar tranche of cash to support closed businesses and millions of unemployed workers, the president’s boast that the recovery was “looking fantastic” lacked substance. The S&P 500 lost more than 8% in the 16 days that followed 13 October.

It wasn’t the first time this year that fears of a Covid-19 second wave had spooked markets, but the rallies that turned the previous panics into mere blips on a chart appear to be absent this time. Investors have stopped listening to hopeful stories about a vaccine and begun looking at the ripple effect that flows from the widespread adoption of masks and physical distancing.

As Dhaval Joshi, chief European strategist at BCA Research, says, consumers who cannot use their nose or mouth in close proximity to others are hardly consumers at all.

He estimates that while lockdowns put a temporary block on economic activity, the face mask and distancing rules will cut as much as 10% off GDP for as long as they are imposed.Stocks in the three hardest-hit sectors – hospitality, retail, and transport – have taken a beating since March.

However, investors who have switched to the tech industry have shrugged off concerns about the virus. The major tech companies – Apple, Amazon, Alphabet (the owner of Google), Microsoft and Facebook – were behind the 50% increase in the S&P 500 since Trump took the presidency and have generally benefited from the switch to a more digital economy since the lockdowns in March. If US stocks are to recover their momentum, tech will have to perform.

In the UK, where the FTSE 100 is dominated by banking, insurance and oil and gas companies, share prices have barely recovered after dipping to 5,000 points in March. Across Europe, successful industrial giants such as Mercedes-Benz, Volkswagen and Siemens have been hit as a six-month recovery in their share prices took a negative turn.

Donald Trump’s attack lines in the closing weeks of the US presidential campaign have also highlighted the potential downside for investors of a victory for Democratic candidate Joe Biden on 3 November. Desperate to land some punches on his rival, the president has tweeted more than once: “A vote for Joe Biden is a vote for the biggest TAX HIKE in history.”

So far the claim, which even rightwing US thinktanks say overstates the magnitude of his tax proposals, has failed to shift the polls and they continue to suggest a Biden victory. But distrust of the polls and Trump’s veiled threats to challenge the validity of a narrow Biden victory have only added to stock-market jitters.

One constant source of light for investors has been the actions of central banks. After a brief flirtation by the US Federal Reserve with increasing interest rates during the first years of the Trump administration, all central banks have cut borrowing costs to zero, and some, including the European Central Bank (ECB) and the Bank of Japan, to below zero.

Central banks have also pumped trillions into the financial system to maintain the flow of easy credit to businesses large and small, adding to the sense that whatever Covid-19 may throw at them, companies’ borrowing costs will be negligible.

This week the Bank of England’s monetary policy committee is expected to add another £100bn to the £745bn of “quantitative easing” – purchasing sovereign and corporate debt from financial institutions – it has already injected into the economy. The US Fed’s board will also meet this week and the signs are that the recent slump in stock values will persuade its policymakers to increase its current $7.2tn (£5.6tn) of QE.

Last week the president of the ECB, Christine Lagarde, signalled a further stimulus for the eurozone in December, while the Bank of Japan has said that its determination to print as much money as it takes to keep interest rates below zero is “unlimited”.

Such support from the central banks will be essential as the virus continues to ravage the populations of Europe and the US. Whether it will be enough to turn the stock market back on to a more positive path is another matter.