Covid delivers body blow to investors

More stimulus on the way

The big rebound in European equity markets lasted all of five minutes this morning before petering out and Wall Street is not having any more joy.

Investors have come crashing back down to earth in recent days and equity markets are feeling the pain. It’s one thing coming to terms with no pre-election stimulus – I never quite understood the optimism to begin with – but the real body blow has come from surging Covid cases and the realization that the second wave is shaping up to be brutal.

Governments are seemingly coming to that conclusion on this side of the pond, with France reimposing a national lockdown from tomorrow and Germany opting for a lighter version for now. The severity of the situation is naturally different from border to border but one thing is consistent, they’re all moving towards much more severe restrictions.

That will be devastating for the economy, especially if this wave lasts longer than the first and well into the new year. That must take its toll on sentiment, as well and business and employment, while at the same time coming at great expense to the public purse. It’s time to buckle up, it’s going to be a rough ride.

US voters making their voice heard early

Five days to go until the US election and early voting suggests we’re heading for a record turnout. With mail and early voting already totalling more than 55% of the 2016 total, there’s clearly no lack of motivation and people are making their voice heard early to avoid complications.

It has already been a fierce contest and yet the real turbulence may be saved for the weeks following November 3rd, rather than the week preceding it. With mail-in votes seemingly favouring the Democrats in the early stages, controversy should be expected which will likely take its toll on the markets. The old cliche that markets hate uncertainty could be put to the test in the coming weeks.

ECB lays the foundations for December easing

The ECB held off on adding more stimulus at the meeting today but we won’t have to wait long, with the central bank nodding at more November easing and a “recalibration”. It was widely expected that policy makers would hold off for now, despite it being clear that the euro area is heading for a double dip recession.

There is still a significant amount of unknowns that will become much clearer over the next six weeks, whether that be related to Covid, Brexit or the US Presidential election. That’s a lot of potential downside risk that will influence the new forecasts and the necessary response. The euro is trading a little softer in the aftermath of the meeting, as traders begin to speculate on whether we’ll see the bazooka in December, or something even more powerful.

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