Covid’s effects on Markets
The weak market scenario which is currently being experienced can be highly impacted with the rise in Covid cases. At present, the great fear is that the Chinese government may impose an extended lockdown again which would have a negative impact on production, right at a time when there has been an easing in the shortage of industrial components. With multinationals regaining the ground they had lost in recent months, there is a hope is that there will be no renewed slowdown in supplies or deliveries from Asia.
In the automotive sector, companies such as VW, BMW and Mercedes should export large orders, but in many instances, they are unable to meet them. Similarly, in the US, there is the outstanding case of Boeing, which is the first company in history to have exceeded 1,000 aircraft ordered, but is unable to deliver them due to a lack of components.
At this stage, new lockdowns would be detrimental to the economy, in that they would stunt the post-Covid recovery that is still fully underway. Conversely, it is also true that some lockdowns have brought about positive results, for example, in the case of the Shanghai lockdowns which have caused a reduction in demand for commodities such as oil, thus helping to contain inflation.
In this very volatile market phase, any negative news is compounded. If, instead, the markets were in a positive phase, news about or an increase in Covid cases would be more easily absorbed. The second half of 2022 will be very decisive in order to understand the evolution of the markets and the trends regarding inflation.
In recent weeks, an easing of the shortage of industrial and electronic components has been felt, and the economy is gradually recovering.
European and US companies are again managing to increase production to keep up with very strong demand. Conversely, the inflation situation is worsening, in the sense that the rate of inflation growth is not yet expected to slow down. This brings about a problem on the rate front because Central Banks are becoming aggressive, at least on paper.
The Federal Reserve has already raised rates. The overall situation now is characterized by uncertainty. On the one hand, economic growth seems to be strong and that growth means that a return of Covid and lockdowns in Asia could be supported. On the other hand, rate hikes can act as a significant brake on industrial and economic activity. In the coming months, these two opposing forces will be important factors in deciding how markets will perform.