Second COVID-19 wave hits Europe. What are the potential economic implications?

On the latest edition of Market Week in Review, Senior Quantitative Research Analyst Abraham Robison and Research Analyst Laura Bardewyck discussed rising COVID-19 cases in Europe, the potential implications of next month's U.S. elections and recent economic data releases from China and the U.S.

Will the latest coronavirus lockdowns jeopardise Europe's economic recovery?

In Europe, concern over a second wave of COVID-19 infections has led several countries to reimpose lockdown measures in recent weeks, Robison said, as the rate of new coronavirus cases in the region continues to increase. "England is implementing a three-tier lockdown system, which divides the country into three tiers based on infection rates, with each tier subject to different levels of restrictions," he noted. Northern Ireland, meanwhile, is going a step further with a circuit-breaker lockdown - wherein schools, restaurants and bars are either closed or greatly restricted in their activities for a few weeks in order to slow infection rates, Robison explained.

Elsewhere, the Spanish capital of Madrid recently declared a state of emergency that limits non-essential travel, while France has ordered bars and gyms in its major cities to close. "Even Germany, which fared relatively better than most of its European counterparts back in the spring, is now imposing some restrictions on businesses in the hospitality sector," Robison remarked.

So, what are the possible economic implications of all of these measures? "Broadly speaking, these new restrictions mean that Europe's economic recovery is likely to move forward in fits and starts, as lockdown measures wax and wane," Robison said. He explained that while the latest lockdowns could interrupt the pace of the recovery, they'll likely have less of an impact on the European economy than those imposed back in March and April. However, given that the northern hemisphere is about to enter the winter months - which typically represent the peaks of cold and flu season - the situation bears close watching, Robison stated.

Potential market impacts of U.S. elections

Shifting to Election Day in the U.S., Robison and Bardewyck discussed the potential implications of the possible outcomes. "If the Democratic party wins control of the Senate, the House of Representatives and the White House in a so-called Democratic sweep, I believe a calmer U.S. foreign policy is more likely, as well as higher corporate taxes," Robison said. In addition, an even-larger second U.S. stimulus package - perhaps higher than the $2.2 trillion CARES Act passed in March - is possible, he added.

"A giant stimulus package of this magnitude could lift bond yields and provide a boost for more traditional, cyclical stocks - such as bank names - which are more sensitive to the state of the economic recovery," Robison explained. He added that a shift to a quieter foreign policy may also be beneficial to non-U.S. stocks.

On the flip side, if the Republican party retains control of the White House and the Senate, markets can expect a retention of most of the current administration's policies, including the nation's tax code, which features a corporate income tax rate of 21%. Robison said that a second U.S. stimulus package would still be likely, although it would probably be smaller in scope.

"At the end of the day, regardless of the election outcome, we believe it's important to stay invested throughout this upcoming period," Robison said, stressing that in times of uncertainty, a diversified multi-asset portfolio may be worth considering.

Strong September for U.S. retail sales

Economic data released the week of 12 October was largely positive, Robison said, noting that China reported a substantial increase in corporate credit during September. "This bodes well for Chinese growth amid the economic recovery," he remarked.

Meanwhile, in the U.S., the Philadelphia Fed's manufacturing index for October crushed consensus expectations, rising to a level of 32.3 - up from a reading of 15 in September, Robison noted. In addition, U.S. retail sales during September expanded at a 1.9% clip from August, also topping expectations. "The American economy is consumption-driven, so it's great to see numbers like this," he said, "as it lends further proof to the notion that the U.S. economic recovery is still ongoing."

In general, both the U.S. and global economy have recovered faster than most people expected, Robison stated - primarily due to the historic injections of fiscal and monetary stimulus. "All in all, the economic recovery remains broadly on track - and this should lead to a positive environment for equities over the medium-term," he concluded.

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Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.