Just three weeks ago, the German Health Minister Jens Spahn was talking about bringing the covid emergency to an end.
However, at the close of last week, Germany recorded the highest number of new covid cases ever for two consecutive days. Health authorities have acknowledged their anxiety about the situation.
It’s still in the early days of a new spike, but as the weather gets colder and people move indoors, it’s not surprising that case rates have risen all across Europe.
In Germany, the positivity rate has shot up by over 10% of tests, on par with last winter’s records. The seven-day moving average of cases is fast approaching where it was in December of last year. The difference is that virtually all the cases recorded are of the delta variant.
So, what does this imply for the markets?
Are we in for a repeat?
Of course, last winter the situation was quite different as there were no vaccines. And while case rates have spiked dramatically, the number of patients in intensive care or death rates have not mirrored what happened last year.
Therefore, as it stands, Germany hasn’t been talking about a return to lockdowns. But we have to remember that the current Health Minister has his days numbered.
Coalition talks between the Greens, SPD, and FDP continue, without confirming a date for when they will form a new government. But it will likely be before the official start of winter. This means that any decisions on economic or social restrictions to combat the virus will probably be a matter of the new government.
With investors already uncertain about what policies on a wide range of other issues the new coalition will agree on, the additional question regarding covid is probably not helping risk sentiment.
What it means for the markets
The question now is whether the rise in cases is affecting decisions made by businesses and investors. That is likely to be the driver of the market, particularly as we go into the close of the year.
To help answer that question, we can review the ZEW Economic Sentiment survey. It’s important to note that this survey was conducted as covid cases across Germany rose. Nonetheless. it concluded days before the new peaks in cases, and before Pfizer announced that they developed a new treatment for covid that was 90% effective.
Even so, the ZEW survey could show a little bit of softening of optimism, with the Current Conditions metric falling to 18.0 from 21.6. That’s still positive, but off the summer highs. And unfortunately, it could continue a trend towards less optimism as we move into winter.
The shakers and movers
What the market cares most about, however, is the outlook.
In this metric, analysts also expect the German ZEW Economic Sentiment Index to drop to 20.0 from 22.3 in the last month. The interpretation from this is that German businesses still see the situation over the coming months as better than it is currently. In turn, that could keep optimism alive for a little while.
At the same time, we have the release of the ZEW Economic Sentiment Index for the whole eurozone. Again, analysts anticipate that this figure will decline to 18.5 from 21.0 in October. A considerable change in this indicator could affect the market’s risk appetite.
If there is a reversal of the trend and a substantial beat of expectations, then we could see better performance across European equities.
Monday, 08 Nov, 2021 / 11:42
