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Stock market: is it running out of steam again?


Global equity markets experienced a sharp pull back yesterday, with the MSCI World Index declining 4.7%, its sharpest one-day decline since the middle of March. A combination of factors contributed towards the market weakness, including an increase in Covid-19 cases in the US, cautious commentary from the Federal Reserve on the US economy, and a decline in the oil price.

The rise in Covid-19 cases came in southern and western US states which have begun to open up following periods of lockdown. Both Texas and Florida recorded their largest one day increase in coronavirus cases, while California too has seen a sharp increase in infections.

Meanwhile, the US Federal Reserve predicted that it would not raise interest rates until at least the end of 2022 due to the impact of the Covid-19 pandemic on the world’s largest economy. The Fed expects the US economy to contract by 6.5% this year, before growing by 5% in 2021, and that core inflation will still be short of its 2% target in 2022, providing the central bank with a licence to maintain its highly accommodative stance in order to support the post-coronavirus recovery.

“Fears of a second wave combined with the Fed well and truly killing off the V-shaped recovery idea,” said Neil Wilson, Chief Markets Analyst at “You could say yesterday’s tumble was just the Fed trade and has now played out, so we need to look for new information to act as a catalyst, but second wave fears persist.

The UK’s FTSE 100 has seen a fairly sustained fall this week, having been probing the 6500 mark. It has shed almost 400 points as traders have woken up to the fact that the Covid-19 virus is not magically going away once the Premiership football league takes to the pitch again. We anticipate that there will be an ongoing drag on many FTSE stocks in 2H as economic factors created by the virus feed into business profits.

Stock markets: S&P 500 and NASDAQ look jittery

The US market did not react well to the Fed announcement – we saw a big drop in the S&P 500 yesterday from 3212 down to a resistance level at 3000. Further negative economic data could take this down past 3000, although at the time of writing the S&P 500 was trading slightly higher at 3037. Even the NASDAQ, which is stuffed full of the sort of tech stocks which have performed well in Q2, has given up some ground in the last 48 hours, down from 10078 points to 9608 at time of writing.

These falls should be considered in the context of what has been an extraordinarily strong run for global equity markets from the lows seen in the middle of March. That rally has been supported by progress made on containing the spread of the pandemic, and this week’s moves indicate that the market, in the short-term, remains sensitive to Covid-related headlines.

“We continue to try to look beyond short-term market gyrations and focus on long-term themes, including those that are being accelerated by the effects of the ongoing pandemic,” said stock broker Killik & Co in a note to clients today.

What does this all point towards? Our stocks team has been concerned for some time about the pricing of share indexes, especially in the US, where we think the values do not belie the condition of the underlying economy. We are not heading for a V-shaped recovery. The virus is going to take some more time to fully play out, and as more shops and schools re-open in the UK next week, the prospect of a second wave here also increases.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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