Who could fall further if UK Covid cases continues to rise?
Latest Covid restrictions hurt domestic stocks, but a continued rise in cases could spell trouble for some specific sectors
Second wave of restrictions begins with domestic firms in the firing line
The recent rise in the UK coronavirus cases has dealt a major blow to the economic prospects for the remainder of the year. While Boris Johnson had previously sought to revive the economy by encouraging visits to restaurants, pubs, and workplaces, we are seeing that advice gradually reversed to the dismay of many business owners.
However, from a government perspective, the one thing that needs to be avoided is a detrimental second lockdown. With that in mind, the government will need to see a tangible decline in the ‘R’ rate in response to these latest measures. For now, measures such as the implementation of a 10pm curfew on pubs, bars, and restaurants appears to be a soft first foray that is unlikely to make a significant reversal in the trend of infections.
Traders will begin to watch the numbers very closely in the coming weeks as we are likely to see further hardline steps taken if the current trajectory is maintained. While the government has once again advised people to work from home, they appear unlikely to send children home from school given their recent push to return some semblance of normality for children. That means we are likely to see further targeting in relation to social situations, such as gathering size or type of establishment allowed to open. Pubs, bars, restaurants, and hotels remain at risk on both fronts. The hope is that enforcement of protective measures such as masks may avoid more hardline steps, yet the services sector is more than likely to bear the brunt of any further restrictions.
One way to play such a possibility is to look for weakness in the domestically focused FTSE 250 index rather than the highly internationalized FTSE 100. With the index dropping to the lowest level in almost four months today, we are seeing some strength come back into play given the importance of this zone of support. That full breakdown below this 16738-16818 region remains elusive, yet we could be on the cusp of such a major bearish exit following months of consolidation.
Pubs could continue to bear the brunt
With pubs and bars commonly associated with reckless behavior, a failure to bring down the ‘R’ rate could lead to further restrictions on the sector. Mitchells & Butlers PLC saw a six-month low yesterday, with further downside likely if we continue to see the virus profligate. As such, while we are seeing a rebound today, that move could be a short-term retracement if the latest measures do not suffice.
Airlines could tank if quarantine rules are implemented
Another area of interest comes in the form of the airlines, with the rise in Covid-19 cases increasing the likeliness that other nations will impose quarantine restrictions on the UK visitors. Such a move would be hugely detrimental to UK-focused airlines, as highlighted by the selloff we have seen of late. One example of this comes from IAG, with the stock back into seven-year lows today. There is a strong chance we will see further downside if the rise in cases encourages quarantine measures on UK visitors.
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