Europe's Second Wave

By Matthew Klein |  Friday, September 18

Quadruple Witching. On the third Friday of the third month of each quarter, options and futures contracts for individual stocks and for stock indexes all expire on the same day. Traders call this a “quadruple witching.” They normally drive up trading volumes earlier in the week as they roll over the expiring September contracts into new ones, but otherwise it’s a scary name for a non-event.

Today was no exception: Markets functioned smoothly enough, although they dropped sharply in light of worsening news about the resurgence of the virus in Spain, France, the U.K., and Israel.

All four countries had seemingly gotten the virus under control during the spring—sometimes at great cost—but the relaxation of controls in the past few months has caused the number of new confirmed cases of coronavirus to spike sharply above the previous peak in March. With the exception of the U.K., the spread of the virus is now more rapid than in the U.S. Officials are understandably worried about the scale of this second wave leading into the fall and winter, when hospitals are under greater stress because of the flu.

While U.S. stocks dropped across the board—409 components of the S&P 500 stock index fell today, as did all 11 sectors—the hardest-hit companies were the ones disproportionately exposed to fears of the virus. The biggest losers of the day included cruise lines (Carnival and Norwegian both down 6%, with Royal Caribbean down 5%), hotels (Marriott International and its real estate investment trust, both down more than 4%), retail landlords (Vornado and Kimco, both down 5%), and an operator of senior-care homes and doctors’ offices (Healthpeak Properties, down more than 5%).

Overall, the S&P was down 1.1%, with the real estate, utilities, technology, and materials sectors losing about 2%. European stocks were down comparable amounts, although shares in China, Japan, and South Korea were all up. Yields on U.S. Treasury debt were up slightly, as was the dollar. Oddly, gold and silver prices were also up, as was copper. (The “normal” thing is for metals prices to fall when yields rise.)

In fact, the front-month copper futures contract hit its highest settle value since June 15, 2018. Copper used to be a decent signal of the state of the U.S. industrial economy, but over the past few decades it has been much better as an indicator of Chinese policy. China accounts for a little more than half of total demand, and basically all of the incremental demand since 2000.

The copper price plunged when the pandemic hit China in the second half of January and again when the virus curbed global demand for Chinese exports in March. Since then, however, the copper price has gained almost 50%. Not coincidentally, the Chinese government has responded to the pandemic by aggressively boosting credit supply to the businesses that drive copper demand.

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