Markets wobble on second-wave fears

The eyes of global investors were trained on London this week, but not for good reasons. Speculation about a new lockdown in Britain saw the FTSE 100 slide 3.4% on Monday, its worst one-day loss since June. The drop wiped £52bn off the value of British companies. Concern about a second wave of the pandemic in Spain and France also hit European bourses, with Germany’s Dax falling 4.6% on Monday. The FTSE remained volatile the following day but finished higher as Boris Johnson announced milder measures than many had feared. 

Markets were already feeling woozy before this week’s new pandemic restrictions, says Rupert Thompson of wealth manager Kingswood. Global equities ended last week down 4.5% from their early September highs. “Central banks have now spent most of their ammunition,” but politicians are reluctant to provide further fiscal stimulus – in the UK, debate continues about extending furlough schemes beyond October. This week’s turmoil was a reminder that Covid-19 can still rattle investors.

And deservedly so – the new restrictions carry a significant economic cost, says Paul Dales of Capital Economics. We forecast that if this week’s new measures continue for several months then the recovery will be delayed, with the British economy unable to regain “its pre-crisis level until the second half of 2022”. If a two-week “circuit-breaking” lockdown is brought in at some point then GDP will take an immediate 5% hit. That would push back a full recovery until 2023, a year later than if there are no more restrictions.

It’s Britain’s fault! 

For Wall Street traders, Monday brought back nasty memories of the crashes in March, say Ben Eisen and Anna Isaac in The Wall Street Journal. A 500-point fall in the Dow Jones index was accompanied by declines in oil and gold prices, a cross-asset washout that sparked “anxiety” about “further turbulence” to come. 

Larry Kudlow, Donald Trump’s economic adviser, pointed the finger at Britain, telling a reporter that the market turmoil was “coming out of London” because of “worries that Britain might shut down”. But the US has its own headaches (including the upcoming election) and September is often the start of a “treacherous season”for markets, says Randall Forsyth in Barron’s. From Black Wednesday to Lehman Brothers going bankrupt, the month has a nasty habit of serving up the end-of-summer blues.

Long-suffering British investors have become accustomed to market whiplash. The FTSE All-Share has been “an absolute hound” in recent years, as Russ Mould of AJ Bell notes. Since the Brexit vote in 2016 it has underperformed all other major investment regions on a total returns basis. Even Latin America – where Brazilian turmoil has mingled with an Argentine debt default – has done better. The crucial problem is the FTSE’s heavy exposure to out-of-favour energy and finance stocks. That makes the market a value play by default. British shares are unlikely to shine until the world economy manages to stage a “strong, inflationary recovery”.