Risk Off As Covid Fears Overshadow Vaccine Elation

European markets ae pointing to a sharply lower open on the bell, following on from a steep sell off on Wall Street overnight.

Charts (6)

European markets ae pointing to a sharply lower open on the bell, following on from a steep sell off on Wall Street overnight. The vaccine euphoria of earlier in the week has well and truly faded, replaced by concerns over record high covid cases and more extensive lockdown conditions.
Covid cases hit record highs

In the UK the number of covid cases topped 33k. In the US the new number of daily infections covid cases hit a record 130,000 per day. The acceleration in cases points to more economically damaging restrictions to stem the spread of the virus. In the US the need for tighter restrictive measures comes as the fiscal stimulus talks have stalled. This leaves the US economy in a precarious position of potentially tighter, economically harmful restrictions without a rescue package to prop up the economy.

Here in the UK the overriding fear is that the one-month national lockdown simply won’t be enough. An extension of lockdown will deepen the economic scars left by Covid, lifting unemployment and making any form of economic recovery more drawn out and challenging.

Risk off trading
Risk aversion is dominating at the end of the week with investors pulling out of riskier assets such as stocks whilst flows into safe havens such as gold are on the rise. The rotation into value stocks and out of tech has been stopped in its tracks, with Nasdaq futures outperforming. This is a complete turnaround from earlier in the week when news of Pfizer’s vaccine candidate being 90% effective sent stocks surging to 8-month highs but dragged on US big tech.

The vaccine elation has been replaced with the realisation that the vaccine won’t be widely available for another 4 – 6 months. WIth covid cases surging, these 4 -6 months will be extremely challenging both from a health perspective and economically. So, whilst there is now light at the end of the tunnel, first there are a few very dark months which must be survived.

EZ GDP
Looking ahead, Eurozone Q3 GDP reading is expected to confirm a record 12.7% rebound. Although with France & Germany, the Eurozone’s two largest economies back in lockdown and Italy considering it, a double dip recession is almost certain, making Q3 numbers dated already.

FTSE Chart
  

Whilst the FTSE looks to extend losses from the previous session, it holds on to the majority of gains from earlier in the week. On the daily chart, the FTSE continues to trade firmly over the 5 month old descending trendline, and its 200 day moving average, as well as its 50 and 100 day moving average indicating that the positive bias remains intact.
Support can be seen at the 200 sma (6050) prior to 100 sma (6000). A fall below these levels & the descending trendline at 5950 could negate the current bullish break higher and see the FTSE resume its longer term bearish trend. On the flip side, resistance can be seen at 6500 June high. 



More from FTSE 100

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.