❗ Lockdowns in Europe: opportunity or trap?

1:41 PM October 28, 2020

👁‍🗨 As the second wave of pandemic gathers momentum, especially in Europe, governments are forced to act.

While the consensus view was that a return to lockdown was unlikely, this is exactly what is taking place. When we look at the charts, imposition of lockdown was actually a turning point in March. Will it be the case again this time?

What are governments planning to do?

Economic costs of lockdowns were very substantial: growth cratered and massive fiscal packages were required to stave off a painful recession. Because of these costs and fairly rapid reopening the market consensus assumed the lockdowns would not be repeated. Fast forward to present and the dark scenario is being implemented: monthly lockdown in France, state of emergency in Spain, serious restrictions in Germany. Investors are adjusting their views and positions and equity indices are cratering.

Lessons from March

This is the same pandemic but the situation is different. Back then the pandemic was new and no-one really knew how serious it could become. Furthermore, investors didn’t know that central banks would respond in such aggressive way. As a result, imposition of lockdowns – as we can see on the DE30 chart – was actually a TURNING POINT for indices. Does it mean the recent sell off is about to be over soon?

Market opportunity or a trap?

There are two obvious difference with the spring: levels and central banks policies. Despite recent sell-off indices are still WAY higher compared to March lows. We are not even talking the US indices where US100 is far above pre-pandemic highs. Even looking at the DE30 – the index trades above 11500 compared to the March low of less than 8000. Then again, central banks have been actively forcing investors out of cash by communicating that interest rates will be lower than inflation for a long time. Many investors realized that there are few alternatives to stocks are were waiting for a deeper correction to occur. Such as this one.

DE30 looking for a support

We can never be sure if this is “just a correction”. What we know is that the next support zone for DE30 is between 11000 and 11335 – not too far off.

 

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