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Risks of a Second Virus Wave Are Making Market Watchers Nervous

Market Analysts Are Getting Nervous About a Second Wave of Virus

(Bloomberg) --

There were only six new cases, but the resurgence of the coronavirus in Wuhan, the city in China where the pandemic began, was enough to startle market analysts.

Strategists in Europe, including at Rabobank, Societe Generale SA and BMO Capital Markets, cited the rise in infections in their client notes as a worrying statistic.

There’s “mounting evidence that a loosening of lockdowns risks an increase in the number of infections,” said Jane Foley and Piotr Matys, foreign-exchange strategists at Rabobank, in an emailed note.

Another case in point: South Korea, which relied on people’s willingness to get tested to curb the spread of the virus, saw an increase in infections tied to people who frequented bars. Previously, the number of new daily cases dropped to one or two, and sometimes zero.

The news out of Asia came just in time for Anthony Fauci’s testimony during a U.S. Senate hearing. The top infectious diseases expert said that there was “no doubt” that there would be an increase in cases as the country reopens and highlighted the need to build a contact tracing system to control new outbreaks as they appear.

His cautious statements are at odds with President Donald Trump’s race to reopen the country.

Risks of a Second Virus Wave Are Making Market Watchers Nervous

The reemergence of cases confirms what currency options traders have been warning for weeks, to beware the virus’s second coming. They’ve been expressing their concerns with bets the Swiss franc -- a haven asset -- will strengthen to one per euro for the first time in five years. Demand for nine-month and one-year long-dollar contracts is high.

Their anxiousness over the potential rise in cases also spurred the spread between nine- and one-month risk reversals for the Australian dollar-yen cross -- a risk barometer -- to the widest in three years, with puts over calls.

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Bond investors share a similar sentiment, manifested on Tuesday when the U.K. offered a 10-year syndicated bond. It drummed up almost $100 billion in orders.

The same can’t be said for stocks. They’ve been buoyed by optimism over precedented stimulus plans by governments and central banks. Europe’s main stock gauge was up 0.3%, MSCI Inc.’s index of global equities climbed as much as 0.5% and the S&P 500 Index, which in April had its best month since 1987, fluctuated between gains and losses.

“Stock market investors in particular have been fairly willing to look through the bad news,” said Foley. “There is a strong risk that the market has not yet fully discounted how big a demand-side shock the world could be facing.”

©2020 Bloomberg L.P.