When the novel coronavirus (COVID-19) began spreading to North America in late February 2020, the financial markets entered a period of historic volatility. Asset classes across the board quickly became unhinged as investors braced for an unprecedented global economic shutdown. Amid the early-summer Phase 1 reopen, a single phrase crept into the nomenclature of nearly every industry: second wave.
Let’s delve into what to expect from the futures markets and a COVID-19 resurgence.
Historical Comparison: Spanish Flu Of 1918
As a general rule, traders and investors are fond of historical data. For many, parallels between COVID-19 and the Spanish influenza epidemic of 1918-1919 are viewed as being increasingly valuable. In fact, the concept of a COVID-19 second wave is derived from the 1918 Spanish flu.
The hard data from 1918 is astounding, specifically as it pertains to a resurgence of the virus. Here are the key stats about the Spanish flu of 1918-1919 that students of the futures markets and COVID-19 contagion are referencing:
- In less than a year, 50 million to 100 million people worldwide perished. The virus claimed 600,000 victims in the United States. These figures account for between 1-2 percent of the global population.
- The initial onslaught of the virus occurred in October and November 1918. The second wave of the pandemic came during February and March 1919.
- In many areas, face masks were required, with quarantines and travel restrictions imposed.
Here are a few comparable statistics from the first five months of the COVID-19 pandemic:
- Roughly 17.5 million cases have been confirmed worldwide.
- Global deaths total nearly 675,000, with 152,000 being in the United States.
- The initial onslaught of COVID-19 came in March and April 2020. Following a pullback, confirmed cases of the virus surged beginning in late June and throughout July 2020.
As of this writing, medical analysts continue to debate whether the first wave of COVID-19 has ended or a second wave has begun. If the pandemic is consistent with that of 1918, then a second wave would come approximately three months after the virus first set in―August of 2020.
The Futures Markets and a COVID-19 Second Wave
Going into the second half of 2020, the trillion-dollar question is this: Will a COVID-19 resurgence prompt another global shutdown? Although the answer to this question remains unknown, a return to mass quarantines is plausible. If the global economy is locked down again in 2020, a few things are likely for the futures markets and COVID-19 response:
- Safe-haven strength: Following the COVID-19 July resurgence, steep rallies were observed in gold, silver, and the Swiss franc. These gains are likely to be extended during a second wave.
- Equities market turbulence: In the 90 days after March 2020’s panic lows, the DJIA, S&P 500, and NASDAQ had all regained at least 78 percent of their pre-coronavirus value. Amid a second wave, index values would likely retrace.
- Energy weakness: If another global lockdown ensues, demand-side questions will hamper WTI and Brent crude oil pricing.
- Chaotic USD: The USD has put on a show during the COVID-19 pandemic. First, the greenback acted as a safe haven, but it was swiftly devalued. In the event of a second wave, it isn’t unreasonable to expect a similar scenario.
If March 2020 taught us anything, it’s that the U.S. government and U.S. Federal Reserve will do whatever is necessary to stabilize the markets. Should a second wave of COVID-19 force another American shutdown, more fiscal stimulus and quantitative easing (QE) are guaranteed.
Although stimulus and QE will support a rebound in risk assets, the intermediate and long-term impact on the USD may prove negative. This dynamic is likely to boost inflation risk, sending commodity and foreign currency futures higher. Conversely, USD valuations are likely to struggle as equities index futures volatility becomes enhanced.
Interested in Using Futures to Trade During the Pandemic?
Accurately projecting the behavior of both the futures markets and a potential second wave of COVID-19 is a challenging feat. However, one thing is certain: Action brings opportunity.
If you’re interested in learning more about how to capitalize on pandemic-driven market volatility, contact Daniels Trading today. No matter if you want total control or prefer the assistance of a futures market professional, the Daniels team is committed to help you reach your financial goals.