Another lockdown, another crash?

The number of COVID cases reached a peak since the beginning of the pandemic. In some European countries, the number of daily cases is almost 5 to 10 times higher than it was during the Spring episode. Consequently, if a country went in lockdown at 1000 cases per day, a similar action should be in place at 10 000 cases. What would a second lockdown mean for the real economy and the stock market? Can we see the leading indexes at a historical high amid two lockdowns in a year? Or should we hedge against a downward scenario?

Many countries in Europe, including the United Kingdom and France, took actions towards a lockdown. The polls show that Biden victory is very probable and under the hypothesis of Democrats taking over the White House, we could expect a federal lockdown in the United States. By Christmas, the Western world could go back in the same situation it was in March. If this scenario becomes a reality, any additional stimulus or federal spending policy may be useless, and a wave of bankruptcies could hit the real economy. High observed default rates would directly impact the banks’ shares which are already at five years low. January could be a very complicated month, and all dues of the pandemic may be paid in full next year.

If the foreseeable correction expected in November does not occur, the market might plunge in January 2021. The quantitative easing may need to stop, and the US Treasury could redirect the funds to bailouts. Therefore, it is maybe the time to invest in out of the money puts and sell calls on the leading stock indexes.

Without great solitude, no serious work is possible. Pablo Picasso

Market overview

No news is good news… This seems to be the case of what is going right now in most markets. Not many things emerged from the stock markets since last week. The leading indices remained in positive territory, continuing the tendency started after the mid-October dip. The volatility levels remained relatively low, as VIX, the leading volatility index remained at a similar level as in the previous week.

The US retail sales figures for September looked better than expected, and Pfizer announced that its vaccine moves forward in the FDA approval process. These positive signals provided limited support to the stock market, which ended the week cautiously.

Focus:

Loop Industries

Loop Industries is a Canadian based company developing an innovative sustainable plastic technology. Loop's share plunged earlier this week amid a negative report issued by a reputed shorter.

Hindenburg Research published a report on Wednesday targeting Loop Industries and its CEO Daniel Solomita. Hindenburg points that the claims of innovation in the company are not real and that Solomita sons, who act as lead scientists for Loop, "appear to have no post-graduate education in chemistry and list no work experience other than Loop".

After the release of the report, Loop's stock went in disarray and found an equilibrium only towards the end of the week. Given Hindeburg's track-record, there are meagre chances of a positive outlook for Loop Industries.

Bonds:

Euro Bund

Euro Bund is the crucial indicator of the state of the bond market in the EuroZone. The second wave of the pandemic forced the European Central Banks to continue its policy started in the spring in order to help the member countries to face economic distress.

The recent increase of the Euro Bund in October might deliver an interesting signal about the foreseeable fiscal and monetary policy of the Union in a post-pandemic world. In March, there were talks in Brussels about issuing "perpetual bonds" to cover the costs of the crisis. Parts of Europe entered already a second lockdown. Thus, the current situation will require a massive bailout, and for achieving this, the only option for Frankfurt would be to issue "perpetual bonds".

Oil:

Mean-reversion is back

Light crude oil prices fluctuate since September in a tunnel centred around 38-39 USD per barrel. All other oil contracts follow a similar dynamic. It is almost like oil prices follow a mean reversion dynamic.
In the early 1990s, it was believed that commodities and particularly oil prices follow a mean-reverting process around a level that reflected the physical supply-demand equilibrium. Since those times, oil became the object od financialization as many investment banks took positions in this market.
The mean-reverting model did not work for the past 20 years. If oil goes back to mean reversion, then this does mean several things:

1. It shows the market is driven mainly by the physical traders and by the real demand
2. It shows that the presence of financial institutions is decreasing in the energy market
3. It could mean that the forward curve may go back into backwardation
   

Market outlook

Nasdaq continued to evolve into positive territory above 11,500 while the Dow Jones kept the gains from the previous week reaching 28,600 points. We expect to see the leading stock indexes beginning a bearish pattern as we are approaching the US elections and a significant swing is expected in November. The perspective of a second lockdown could plunge the stock market as it did in March, earlier this year.

As predicted Bitcoin’s price managed to climb at 11500, before retreating towards the end of the week above the 11,300 level. The leading crypto-currency is consolidating its positions. In the case where Democrats take over the US Senate and facilitate the way for a more conservative tax policy, there are good chances to see Bitcoin soaring above 12,000 and even higher.