Industry Comment: Are Localised Lockdowns Enough To Derail Markets again?

Joshua Mahony, Senior Market Analyst at IG, discusses market reactions to lockdown measures.

“Reversals in the recent lockdown easing measures throughout Texas and Florida highlight the new norm of more localised action to help stem the virus. UK airlines are benefitting from expectations of a ‘thumbs up’ for summer travel from Boris Johnson.

“European markets are treading water as we kick-off a new week, with the positive implications of easing lockdown measures weighed up against surging Covid-19 cases throughout the US.

“Nevertheless, while the US experience des provide a warning sign of what could be around the corner, investors seem happy to jump aboard travel stocks such as TUI and easyJet ahead of a surge in European travel for the month ahead.

“With Johnson set to announce a host of countries within which UK travellers can visit without the need of a quarantine on return, we are seeing some optimism that demand could pick up as the government essentially provides the go-ahead for summer holiday plans.

“As the number of deaths Covid-related deaths pass 500,000, markets are attempting to figure out exactly what the new norm will be given the threat of further outbreaks when attempting to lift lockdown measures.

“The US is well and truly at the forefront of this second wave of infections, with the decision to release lockdown measures without truly driving down numbers in the first place providing a recipe for disaster.

“However, much how we are seeing Texas and Florida reverse their reopening in the face of surging Covid-cases, so the city of Leicester in the UK looks set to extend their lockdown by two weeks given the outbreak in the area.

“Unfortunately, this is likely to be the new norm until science can find a long-term solution to the virus, with localised lockdowns required in a bid to avoid another hugely damaging second nationwide closure. For traders, the question is whether these localised lockdowns are enough to spark another major sell-off.

“Oil price have been on the slide since Friday’s peak, with the surging number of Covid cases in Southern states signalling a potential second hit to demand if stay-at-home instructions are put back into place.

“Amongst those troubles’ states, Florida, California, and Texas account for almost 30% of US gasoline consumption, highlighting how this crisis could once again damage energy prices if it escalated into another lockdown.

“Meanwhile, the recent bankruptcy filing from shale pioneer Chesapeake Energy highlights just how tough it has been for US firms in the energy sector, with Trumps promises or government support clearly not enough to stave off the inevitable.

“With oil prices still below the breakeven price required by many US producers, there is a good chance that this is the first of many.”