Stocks extend last week’s losses on second wave fears

Morning Note

European stocks plunged and US futures tumbled on Monday as equity markets extended last week’s losses amid fears of a second wave to the pandemic. We are seeing pockets of cases in Beijing suddenly – the first in 50 days, whilst Alabama, Florida and South Carolina have reported record numbers of new cases for three days straight.

The dreaded second wave will weigh on equity markets – it is already sparking a wave of selling – and force policymakers to chuck even more money at this. Markets just need to think things are heading in the right direction to go up; it’s the rate of change that matters, so fresh waves of cases are taken as a sell signal.  Equity markets had also clearly become overstretched and overbought.

Stocks dumped on fears of Covid-19 second wave

The FTSE 100 slumped under 6,000 to test the 50-day moving average around 5950, potentially heading for the key support region at 5900. If this goes we can easily see a retreat to the Apr swing lows around 5641 and 5575. BP shares slumped 5% as it wrote off $13.5bn-$17bn of asset values due to lower forecast oil prices – this will only raise speculation that the board will be forced into cutting the dividend sooner or later.

Asia was broadly weaker overnight, with sentiment also being affected by Chinese industrial production, fixed-asset investment and retail sales all falling short of expectations. Futures indicate the S&P 500 open around 2950, a little above the 100-day and 50-day moving averages, having broken beneath its 200-day line. Look especially at 2936/8, where the 100-day and the old 61.8% retracement of the March rout converge.

Bulls fought a rear-guard action on Friday, but that rather hard-fought rally looks capitulation and the path back to 2800 is open. What could change this? You’d need to see a drop in cases and the rebound in the economy as stimulus works its way through to consumers spending with confidence again.

As discussed last week, S&P 500 valuations are very rich and first the Covid-economy trade and now the first reopening trade are all but over, so investors need to find new reasons to buy. Second wave fears are dominating, and the Fed has killed off any last thoughts of a V-shaped recovery.

Bank of England, Brexit in focus this week for UK assets

The Bank of England will this week need to stump up another £100bn-£200bn in QE but should leave rates unchanged. It’s been painting a rather optimistic view of recovery but will need to lower expectations this week for how soon the economy gets back to normal.

On the Brexit front, Boris Johnson will hold a call with EC boss Ursula von der Leyen today in what could be a moment that injects talks with new vigour. The PM will likely threaten no-deal, but it’s hoped this will focus the attention of the EU on delivering a compromise. GBP will be exposed to significant headline risk and may partially explain the currency’s fall this morning.

FX was in risk-off mode too, with the dollar finding fresh bid. GBPUSD broke down through the 1.25 region and was last at the lows of the day with the 50-day moving average around 1.2410 in sight. EURUSD was holding at 1.1230. Crude prices were weaker as risk sentiment soured, with WTI for August trading under $35.

Chart: SPX eyes path back to 2800