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Europe in Agony: Winter is coming

By Marius-Cristian Frunza
Weekly Briefs

Europe seems back in the Middle Ages when one of the key challenges was to pass over the winter. Since mid-October, the second wave of the Sars-Cov-2 pandemic disseminates all over the European continent at an unprecedented speed. The first wave looks just a small bump in terms of the number of infected people. The death toll is also progressing with an increasing pace. What is the impact on the financial markets?

Macron and Merkel, the leaders of the biggest European economies, decided to reinstall the same strategy as in March and ordered national lockdowns. The markets reacted immediately, and the leading European stock indices plunged reaching lowest levels since June. The long term effects could be more damaging than what we observed after the March episode. The retail sales before Christmas represent in average 20% of the yearly turnover. Therefore, the last quarter’s GDP could be a disaster, thereby plunging the EU’s economy into a prolonged depression.  

The European Central Bank may have the temptation to continue printing monies for buying shares, but risks of such a strategy, in the long run, are not qualified. Thus, the likelihood of observing throughout the winter unravelling stock markets is significantly high.

The last piece of the puzzle is how the UK and the US will deal with the second wave and whether they will opt for a new lockdown. If this hypothesis holds water than the dawn of next decade looks dismal.

The winter will be difficult. Four long difficult months, but it will end. Angela Merkel, German Prime Minister

Market overview

After two months of calm, the volatility index spiked amid turmoil on most financial markets. The second round of lockdowns in Europe and the forthcoming US election make traders more nervous.

Most investors are opting to divest from their stocks’ portfolios, thereby locking in the profit realized during the summer. This leaves the equity market in limbo, depending solely on the mercy of central banks, which should continue to run the money helicopter. The last election night in 2016 was fortunate for many retail investors, who extract profits from market swings. Such an event-driven strategy would require more caution if implemented next week.   The US election could be just a minor driver for the stock market, already dragged into negative territory by bad news across all fronts.

Focus:

S&P 500 Technology

In September, the S&P 500, US’s leading stock index reached an all-time high amid the pandemic outbreak. In reality, only a few values drove this rally, explained by the overwhelming increase of the technology stocks. The S&P 500 Information Technology reunites the shares of the leading tech firms, and since March it has bitten all other indices. Since mid-October, the tech stocks are losing ground, and this also impacts the leading index. The digitalization of the economy triggered by the pandemic seems not to have produced the level of profits required by the investors.

Markets could inflict major corrections to technology stocks, bringing them closer to their fundamental value. The second wave of the coronavirus pandemic might bring the burst of the tech bubble.

Focus:

Boeing

Boeing is for many analysts a doomed stock. The troubles started prior to the pandemic outbreak when the regulator banned the 787 MAX aircraft for safety issues. The diminishing turnover of airliners since March plunge the leading American aeroplane manufacturer in a distressed situation.

Boeing asked several times for a bailout from the US government, but this would not solve its problems. Moreover, the second lockdown in Europe that could last until January 2021 will seriously hinder the sales of the American firm. So, what are the options left on the table for Boeing? A strong recovery of the travel sector seems to be the only viable solution.  A vaccine against the new coronavirus is much needed to observe the same traffic as before the pandemic. Only a viable vaccine can save this industry.

Focus:

Twitter

Twitter's share lost more than 20% in the last trading session amid quarterly filling, not matching investors' expectations. The number of users of the mini-blogging platform is below the expectations, and the generated profits are also behind schedule. Moreover, earlier this week Twitter was accused of filtering tweets concerning investigations about the candidates involved in the US elections. The current president is a user of the platform, thereby generating a lot of traction. In the case where Biden is winning, Twitter could lose a big chunk of the users' base. Under this scenario, its share price could reach new lows.

Cryptocurrencies:

Bitcoin

When everything else is going bad, Bitcoin is doing well. This week the leading cryptocurrency went above the last peak experienced in July 2019. The rally came amid a tormented timeframe on other markets. The second lockdown brought pessimism amongst investors who are looking for alternatives. The fear sentiment is bolstering the Bitcoin price, crypto-currencies being currently the only safe harbour asset class. Bitcoin’s recent bull juxtaposed over a significant dip on the stock market delivers a prevailing negative signal for the traditional markets.

Market outlook

The anticipated  bearish pattern started earlier and the stock markets moved into negative territory across all fronts. The Dow Jones lost almost 2,000 point hanging at 26,400 points. We expect to see the leading stock indices continuing the bearish pattern as most European countries entered in prolonged lockdowns. If the US follows a similar path, the market dip could be even bigger.

As predicted Bitcoin’s price smashed the psychological level of 12,500 USD and reached 13,500. Given the foreseeable economic depression, Bitcoin could become a safe harbour for investors. The liquidity from the stock market might move slowly but surely towards the crypto-currencies arena. Therefore, we expect to see Bitcoin rising towards higher level amid the US elections.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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