COVID-19 lockdowns have returned anew to hang-out Europe’s financial prospects, forcing traders on Friday to reassess portfolios and promote susceptible property such because the euro and financial institution shares.
Days after the Netherlands, Hungary, Slovakia and the Czech Republic reimposed curbs, Austria put itself again underneath lockdown and Germany’s well being minister refused to rule out one.
Markets had been little soothed by Germany’s international minister ruling out a lockdown and necessary vaccinations for all to tabloid Bild.
The developments upended the buoyant temper in European fairness markets the place French and German shares had hit a string of report highs, due to a robust earnings restoration.
A pan-European fairness index, up 80% from March 2020, slipped half a p.c on Friday.
“One factor is for certain, if the entire of Europe needed to go underneath lockdown as soon as extra, and relying on how lengthy that will final, we would want to rethink our development eventualities,” mentioned Stephane Ekolo, a world fairness strategist on the brokerage Custom.
As markets began scaling again wagers on euro zone rate of interest rises for subsequent yr, an index of European banks plunged 2.5%, its largest each day drop since late September.
The query now’s to what extent lockdowns would possibly hammer expectations for fourth-quarter earnings. Refinitiv I/B/E/S at present flags a 51% rise for the STOXX 600 benchmark, solely marginally beneath 60% in Q3.
It nonetheless compares favourably with predictions of a 21% earnings development for S&P 500 corporations.
However some ominous indicators had emerged for Europe even earlier than the newest COVID resurgence. European knowledge lags U.S. equivalents by the most important margin in over a yr, in response to financial shock indexes compiled by Citi.
Hospitality turnover was additionally weakening, Oxford Economics identified, noting Germany’s 3.5% drop in September.
“Markets have been conscious for a couple of weeks now that this winter might be tough and that the vaccination rollout doesn’t scale back lockdown danger by 100%,” mentioned Emmanuel Cau, head of European fairness technique at Barclays (LON:BARC).
The setback, if it deepens, will show painful to many. BofA’s extensively adopted month-to-month investor survey confirmed funds most bullish on euro zone equities, with a 33% “chubby” and EU banks particularly in favour.
Cau says it’s too early to see the lockdowns as a gamechanger and that traders are reserving earnings off current scorching rallies. And deeply damaging inflation-adjusted bond yields most likely implies that the tsunami of money chasing world shares is not going to ebb fully.
And there might be winners: healthcare shares rose 1% on Friday, whereas the know-how sector gained 0.6%.
Traders made a beeline for bonds, turning Germany’s total yield curve damaging for the primary time since August as 30-year authorities borrowing prices fell beneath 0%.
Ten-year yields, the euro space benchmark, dropped as a lot as 6 foundation factors to the bottom since mid-September at -0.342%.
The euro tumbled to greater than six-year lows versus the Swiss franc and approached 16-month troughs towards the dollar.
“It’s simply constructing, that story of the pandemic not being fairly over in Europe and that’s a knee-jerk flight to high quality,” mentioned Peter McCallum, charges strategist at Mizuho.
“The extra that turns into a theme and we get the market fascinated about a dovish ECB….we’ve obtained some room to fill the (10-year Bund yield) hole right down to -0.45%,” he added.
Some market watchers are beginning to look past Europe.
Deutsche Financial institution (DE:DBKGn) famous that on the cusp of winter, vaccination charges in Austria and Germany at 64% and 69% had been effectively above the U.S. 58% stage.
“Though all of the headlines are in Europe in the mean time, will the USA be extra susceptible than many European nations over the course of the complete winter?” the financial institution wrote.