Investors switch from reopening joy to second wave fear

Rising COVID-19 case numbers and second waves of the pandemic are shifting investors’ perspective from reopening optimism to renewed caution.

The chief concern is rising cases in the US.

However, analysts are also watching Latin America, South Asia and Southern Africa where the pandemic is developing aggressively.

The initial impact of these worries was seen late last week and on Monday morning, when US and Australian markets tipped downwards.

Joshua Mahony, IG Markets senior analyst, says investors may be shifting away from the optimism spurred by economic reopening and into a phase where attention is refocused on the possibility of a second wave of infection.

“The gains we [saw in the US on Friday] highlight the fact that a second wave still remains far from guaranteed, yet we are certainly likely to see volatility and market sensitivity pick up in the coming weeks as COVID cases roll in,” he said.

That shift is happening because hard data is now backing concerns in May that infections were about to rise in new US states.

While case numbers and death rates for the whole of the US have been growing around 1 per cent or less a day, new hotspots Arizona, Texas, South Carolina, North Carolina, Oregon, and Florida are seeing infections spiral.

“It’s not a second wave, they never really got rid of the first wave….the more concerning part is they haven’t been able to isolate what the source of the infection is,” Food and Drug Administration (FDA) commissioner Dr Scot Gottlieb said.

Economies are recovering — fast

US President Donald Trump and Treasury Secretary Steve Mnuchin have made it clear they won’t suffer another lockdown, particularly in the lead up to the presidential election in November.

US jobless claims were unexpectedly lower in June and Rystad, an energy information service, expects road fuel use in East Asia, Europe and North America to return to 97 per cent of normal levels by August.

Markets have run hard under Trump’s leadership but the prospect of surging COVID-19 cases is putting his chances of re-election under pressure, as Americans face the twin prospects of job losses from the lockdown and more COVID-19 cases.

Analysts are divided over whether a Joe Biden presidency would be good for markets, with JP Morgan saying Biden plus a Republican Senate would keep tax cuts in place while removing Trump’s random foreign policy and trade swings, while Saxo Bank analysts note that any winner will inherit the worst of an economic crisis.

Crude oil prices, which had rallied hard since the April crash below $0, lost 10 per cent on Friday as fears of further COVID-19 infections combined with a continued increase in oil inventories and the US Federal Reserve forecasting a 6.5 per cent contraction in US gross domestic product for 2020.

Infections rising in developing countries

Infections in the US are driving market volatility in that country and Australia, but ferociously developing pandemics in Latin America, South Asia, and Southern Africa are most worrying analysts.

“This new wave could be far more deadly than the European and North American wave seen in March and April, as the populations in these regions are larger and lockdown measures have been less efficient,” Rystad analysts said in a note last week.

When COVID-19 was spreading similarly in Western countries, governments shut down social and economic activities. Yet countries in these regions are either reopening or unable to effectively impose restrictions.

“If further measures are not implemented to control the virus, the aggregated number of infected cases will double every 12 days in Southern Africa, every 14 days in Central America, every 18 days in South America, and every 29 days in South Asia,” the Rystad analysts said.

“This means that 50 per cent of the population will have contracted the virus by the end of July in Central and South America and Southern Africa, and by early December in South Asia.”

There is no sign of infections slowing in Brazil, Russia, India and Bangladesh which have now overtaken the worst-hit European countries.

Infection data from most African countries is anecdotal because of a lack of testing, such as in Kano, Nigeria where the health system has been overwhelmed with ill people but few are tested for COVID-19.

However, Rystad data indicates rapid growth in cases in Malawi, South Sudan, Mauritania, Central African Republic, Mozambique, Ethiopia and South Africa. Similarly, Mexico and Chile, and Nepal are all in trouble.

Cases across Africa now touch almost 230,000 according to the Africa Centre for Disease Control and Prevention. COVID-19 fatalities include the former President of the Republic of the Congo Jacques Joachim Yhombi-Opango and Somalia’s former Prime Minister Nur Hassan Hussein.