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What Further COVID-19 Lockdowns Mean for Markets



The risk of further global lockdowns, akin to those we saw sweep the world’s developed countries back in March, is rapidly rising.


The US has been at the centre of the focus regarding this “second wave” of Covid-19. In truth, most of the states who are now at the outbreak’s epicentre never finished their first wave.

Rates of new infection, hospitalisation (and unfortunately, soon likely deaths too) are growing exponentially in states such as California, Texas and Florida.


Europe is also experiencing its own bout of, admittedly much smaller, secondary outbreaks. Germany recently put an entire state (North Rhine-Westphalia) back into lockdown following an outbreak at a meat processing plant.


Meat processing plants have reported similar outbreaks in other parts of Europe too; today the WHO warned that Europe had its first increase in weekly cases in a long time and that 11 European countries are facing a resurgence in cases.


“This second wave of virus is a concern for investors ... but I think the key difference is that unlike last time in March, this time it’s highly unlikely that we would see a shutdown of the global economy,” said Suresh Tantia, senior investment strategist at Credit Suisse’s APAC CIO office.


“Locking down an entire country ... cost(s) you up to 3% of GDP per month, so even the richest nations on the planet cannot afford another two, three months complete lockdown,” he said.

That might be true, but one the deaths start rising, things may well change as focus switches back to saving lives rather than protecting the economy.


In the case of a second wave, maybe we won’t see lockdowns as severe as back in March. But fresh restriction on interaction, plus the undercurrent of fear keeping consumers cautious in their spending would surely hamstring the economic recovery from the first wave.



What this means for markets


Global risk assets flew higher in the months of April and May, with much of the improvement in sentiment driven by the narrative of “economic reopening”. More recently, risk assets have been supported by a string of much better than expected data points in the US and EU for May – which has, in the eyes of investors, raised the likelihood that we see something more akin to a V-shaped recovery rather than a U or L shape.


A second Covid-19 wave, and the lockdowns that come with them, essentially renders both of these much hoped for scenarios as impossible.


With the further spread of the virus comes more economically damaging lockdowns and consumer fear, not V-shaped recoveries.


If this does end up being what happens, risk assets are in for a sharp correction to the downside to reflect the new, gloomier outlook for the global economy.

Will we test March lows?


Another key factor that lifted markets from their mid-March lows was the fact that global central banks and fiscal policy makers essentially threw the kitchen sink at supporting the global economy as much as possible, surprising market’s with their aggression and willingness to step in. Markets will be expecting more of the same, which ought to cap the downside.


Should monetary and fiscal policymakers around the world fail to step up to the plate, this is when you would start to see “it’s the end of the world” type panic, as we did for a few weeks when the pandemic first went global from late February to mid-March. 


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