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Coronavirus: The Second Wave - 31/07/2020

Micro Analysis

31 July, 2020

For General Information only. Not Intended to Provide Trading or Investment Advice. Your Capital is at Risk.

After declaring, the worst was behind them, governments around the world are surprised to be facing a second wave of the Coronavirus. There is a sustained rise in infections. On a global level, current cases reached around 17.5 million with more than 600,000 deaths, while in the US there are more than 4.5 million cases. In Europe, the number of cases has reached 2.7 million.

Fears also grow over possible coincidence between the ordinary flu season and the second wave of COVID-19, which could certainly destroy health systems across the world. In some European countries, the ordinary flu season could start even in late August or early September and with the COVID-19 still present around, the financial markets may start getting seriously concerned about this.

Many countries and U.S. states are already rolling back or postponing their reopening plans because of this. If numbers continue to rise, the return of Lockdowns and Stay-at-Home orders could be seen again around the globe. Taking into consideration that economies did not have enough time to recover and that beginning of the second wave started much earlier than forecast, the following possible financial market outcomes may be expected:

  1. Possible crude oil price downward correction towards $30 (↓);

Surging new coronavirus infections increase the concern about weakening demand. Even without mandatory quarantines, more people will be working from home and commuting less. Less business and recreational travel will also suppress demand for oil, gasoline, and jet fuel.

Technical outlook

crude oil
Graph: Crude Oil, Daily

RSI divergence (yellow and black line on the graph) is a signal for downtrend correction and $35 and $30 represent strong psychological support levels.

  1. Increase in demand for safe haven instruments can push gold to new historical highs beyond 2000 to eventually target the mark of 2300 in the mid to longer run (↑);

In a time of global uncertainty, Central banks around the world have flooded their economies with unprecedented amounts of fiat currencies. This inflationary pressure increased demand for gold as the most popular hedge instrument for currency depreciation. The market could also expect displeasure by people across the world about how governments are mishandling the pandemic, which could lead to big riots, political turmoil and increased financial market uncertainties. This in turn could continue to support safe-haven assets like Gold and Silver.

gold
Graph: Gold, Monthly

Strong uptrend channel (black lines on the chart) indicates an extended price rally and all that after it managed to break above previous all- time high (2011) of $1920 per ounce.

  1. Speculation in the medical sector on companies which are testing new drugs and vaccine for coronavirus and ordinary flu treatments;

Nobody knows which drug company or combination of them will ultimately come up with a successful therapy or coronavirus vaccine. There are at least 20 major ones researching these treatments and solutions. This will lead to high volatility in multiple companies including Pfizer, GlaxoSmithKline and AstraZeneca as investors place their bets on who will succeed. In the meantime, demand for flu vaccines is expected to grow due to fears over possible coincidence with the COVID-19, while supply seems to be limited. The UK has already started to consider a mass immunization against the influenza virus, while manufacturers say that they will struggle to increase production to meet the upcoming demand.

  1. Possible W shape in price movement in travel sectors like airlines and cruise lines and possible new share price lows;

The EU is planning to ban American travelers because of the large numbers of coronavirus cases in the US. These travel restrictions, which could be the first of many as countries begin to emerge from COVID-19 lockdowns, can put strong negative pressure on the global tourism sector. Flight demand could come again under negative pressure, which could weigh on the share prices of some of the Airliners such as the American Airlines or the German flagship carrier Lufthansa. In the meantime, the rising number of coronavirus cases across the world could further postpone plans of the cruisers to restart their services, which could weigh on the stock price of some cruisers such as Royal Caribbean or Carnival.

  1. Increased daily volatility on forex market;

The uncertainty of how the pandemic will evolve and what governments will do about it has significant economic consequences. Previous projections showed the world economy is about to shrink this year by 6.0% if the second wave is postponed or missed. However, if a second wave hits, which now seems upon us, the global economy is expected to contract by 7.6%. Governments and central banks will closely monitor the situation and their reaction will most surely affect the forex market.

  1. Increase in tech, entertaining, social network and e- commerce stock prices which mainly comprise the USA100 index (↑);

People locked in at home due to Stay-At-Home orders need to be entertained and an increase in demand for various kinds of online platforms during the previous lock down confirms it. Netflix is the perfect solution for the bored. Netflix is up over 50% since March 15th and the price may continue to rise. Amazon has nearly doubled since March 15th. Alibaba is up over 30% in the same period. The lockdowns have led to an explosion of shopping from home while brick and mortar stores have been shuttered due to the pandemic. The USA100 index, which is made up of stocks from the above-mentioned companies, could continue to chase new all time- highs.

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