🔻 Virus fears spook markets 🩸

❗ All you need to know about the latest sell-off on the markets

OIL tumbles by 5%, DE30 slides by 600 points, US dollar recovers sharply, volatility shows up nearly everywhere. Just when this year looked all sorted and investors started preparing Christmas gifts all this happens. What caused the panic and should you be afraid?

Virus strikes back in the UK

Since the vaccine news broke out in early November markets were in “all will be great” mode. Central banks and governments continued pouring stimulus while broad vaccination promised a return to normal. A great comeback was expected and – indeed, priced in – for 2021. For this reason all the scary COVID stats and new restrictions (thought to be short term ones) no longer mattered – for markets the pandemic became the thing of the past. Until now. The new mutation of the coronavirus in the UK casts a long shadow on this rosy outlook. What if the vaccines will not make you immune to it? What if the virus can mutate over and over again, not allowing for the proper reopening?

Overconfidence is usually a warning signal

Just one week ago in our weekly webinar we warned about overconfidence on the markets. As you can see here on the chart – the put/call ratio for US stocks slid to the lowest in decades, showing investors’ complacency. We also warned that surging options volumes in the US suggested retail investors started using call options as alternative to stocks. When we combine markets’ overconfidence in outlook with such an extreme positioning, it’s not hard for unwind to take place.

Record low put/call ratio was a warning sign that risks were not priced in. Source: Bloomberg, XTB Research

What to watch?

There are few things fighting for attention right now including US stimulus deal and Brexit talks but from the market perspective these are just distractions. What matters is seriousness of the situation in the UK – if the reopening hopes are dashed, there is a lot of risk-on trades to be unwound. On the other hand, with all the encouragement from the central banks, investors will be happy to “buy the dips” as soon as they think the virus mutation does not change the outlook materially.

US500 still above September highs

Despite all the gloom on Monday US500 remains above September highs when markets were similarly overbought. If a correction of a similar magnitude occurs, the support should be around 3300. Do notice that the whole post-March rally is yet to see the first “true” correction and just a 38.2% retracement would see US500 going all the way back to 3035!