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Could the rise in new coronavirus cases ruin stocks’ party?

Sat, 07/11/2020 - 11:13

After what has been an unprecedented rebound from March’s lows, there could be a significant correction lurking around the corner for the world’s indices. The speed of the recovery to date has beaten almost everyone’s expectations. After all, it took less than 3 months for the Nasdaq to reach new all-time highs since the COVID-induced crisis saw indices lose over 30% in just a matter of days. Indeed, the S&P 500, DAX and Nikkei are all within touching distance of their Q1 2020 maxima. And while central bank stimulus certainly played a pivotal role in stopping the rot, the relaxation of quarantine measures and restart of the real economy has been the chief driver of recent positive sentiment.

But now that we’re seeing increasing numbers both of new coronavirus cases and deaths from the disease, the current uptrend in equities could come under threat. Indeed, global cases soared by more than 1.3 million last week alone and show no sign of slowing. Some will say that an uptick was always to be expected after stringent lockdown measures were relaxed. However, moves by countries such as Serbia and Australia to reintroduce certain quarantine measures in light of rises in cases will undoubtedly leave investors feeling hot under the collar. If additional restrictions are put in place in more counties, it’s hard to see how stocks won’t come under fire (even if the damage isn’t quite as severe as in late March).

Winners and losers

Global equities were trading somewhat mixed on the morning of 8 July. However, they appeared to stabilise as the close of trade approached. This comes after the three major US indices ended Tuesday’s trading lower, marking the end of a five-session green streak for the S&P 500 and Nasdaq. Unsurprisingly, the most significant declines have been in travel and hospitality stocks, with airlines particularly hard hit. In a comment that seems to sum up the industry’s outlook at present, United Airlines (UAL) noted that it expects “demand to remain suppressed until a widely accepted treatment and/or vaccine for Covid-19 is available.”

Nevertheless, wherever there is crisis, there is also opportunity. One sector that is doing very well in the coronavirus pandemic is biotech. For example, against a backdrop of soaring cases, Regeneron Pharmaceuticals was awarded a $450 million government contract to ramp up production of its experimental mixture of two antibodies. The therapy is currently in final-stage testing as both a treatment and prophylactic for the novel virus. Meanwhile, it was announced that another biotech firm, Novavax, will be receiving $1.6 billion in US funding to assure the mass manufacture of its vaccine candidate, prompting share price growth of over 30%.

The increase in volatility brought about by uncertainty surrounding the future trajectory of the novel coronavirus could also spell good news for haven assets such as gold. The yellow precious metal is already above $1,800 per Troy ounce, which represents a nine-year high for the commodity. With new cases on the rise and no viable vaccine or therapy on the market, it looks like gold’s upward trend could continue for some time.

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