The attached note takes a look at the risk of a “second wave” of coronavirus cases impacting economies and share markets. The key points are as follows:
- A serious second wave of coronavirus cases in major developed countries is the biggest risk facing equity markets, and one investors will need to watch closely.
- However, provided any second wave is relatively mild in terms of pressure on health systems and deaths, its unlikely to cause the economic and investment market havoc seen a few months ago.
- As such, our base case remains that the pullback in shares over the last week is part of a correction in a broader rising trend, rather than the start of another big leg down.
The past week has seen a flurry of concerns about a “second wave” of coronavirus cases. It started when US infectious disease expert Anthony Fauci warned the coronavirus outbreak is not over and media started to focus on more than 20 US states seeing a rising trend in new cases, and then over the weekend, China reported a cluster of cases in Beijing around a market. Mass anti-racist protests have probably added to the renewed unease. (While there is no place whatsoever for racism, unfortunately in the current environment, large protests that gather people together increase the risk of the virus spreading). And even in Australia we have seen new clusters – mainly in Victoria – although the daily number of new cases remains around or below 20, so it’s not a major issue in Australia. See next chart.
Source: Worldometer, AMP Capital
These second wave concerns have come at a time when share markets had become vulnerable to a pullback after huge rallies since the coronavirus panic low around 23rd March which had seen US shares gain 44% and Australian shares rise 35%. We discussed this last week in Shares climb a “wall of worry”. And so, shares have seen a 6 to 7% correction in the last week before recovering some of that decline in the last few days.
After major bear market lows associated with recessions its common for shares to surge higher, get very overbought, and then see a pullback on concerns about a “double dip” back into recession. The pullback then sees shares shake off some excesses which then allows the rising trend to resume. Second wave virus concerns and fears it may result in a renewed lockdown and double dip in economies looks to have triggered the pullback over the last week. But the question is whether it’s just a correction in a rising trend or will it turn into another big leg down in shares? A key determinant could be how serious any second wave is. This note looks briefly at the main issues.
But first, where are we with coronavirus globally?
While worries about coronavirus perked up over the last week, there has been little change to the broad trends in terms of coronavirus cases. New cases continue to trace out an uptrend globally, driven by emerging countries, but new cases in developed countries are well below their early April highs (and this played a big role in the rally in share markets since March).
Source: ourworldindata.org, AMP Capital