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Europe Is Leading the Way Down in Markets Gripped By Covid Fears

Ksenia Galouchko
·3 min read

(Bloomberg) -- Europe’s race to contain the pandemic is raising alarm bells across financial markets.

Moves from stocks to the euro and Italian bonds show investors are grappling with the economic fallout from lockdown restrictions that are now some of the toughest in the world. While markets globally have taken a dip this week, the hit was most severe in Europe.

The Stoxx Europe 600 Index sank as much as 2.7% on Wednesday, reaching the lowest level since May. In contrast, U.S. equities are only at a three-week low and Asian markets have barely budged.

“A second lockdown could well be the death knell for a lot of businesses who just about survived the first lockdown,” said Michael Hewson, chief market analyst at CMC Markets.

The selloff on Wednesday was sparked by news that German Chancellor Angela Merkel will propose closing closing bars, restaurants and leisure facilities for a month. France is also expected to announce new curbs after coronavirus deaths reached the highest since April.

In Italy, Prime Minister Giuseppe Conte approved a plan to limit opening hours for restaurants and shut gyms. In Spain, the government has imposed a national curfew.

“The market’s complacency about the economic impact of a second wave appears to be breaking,” said Peter Chatwell, head of multi-asset strategy at Mizuho International Plc.

Belgian Hospitals Fill Up; Germany’s New Curbs: Virus Update

Across the continent, there were signs of stress.

The Markit iTraxx Europe index, a gauge of corporate credit-default swaps, reached the highest since September.Italy’s 10-year yield premium over Germany rose by nine basis points, the biggest increase since June on a closing basis.The Vstoxx Index, a measure of implied volatility for European stocks, rose 3.3 points to 36, the highest since June.Stocks in Europe that are most sensitive to economic growth were hit the hardest, with construction and travel shares sliding more than 2%. Among the few exceptions were companies that benefit from people staying at home, such as online grocery retailer Ocado Group Plc.

“We would currently refrain from buying this dip. The market looks very vulnerable to us,” said Oberbanscheidt & Cie portfolio manager Andre Koppers.

The European trajectory, in which governments have forcefully imposed business restrictions to limit the strain on public health services, stands in contrast with the U.S., where authorities have taken a lighter approach.

As a result, Europe’s economic outlook is weaker than the U.S., and bond markets are reflecting the difference. The gap between 10-year bund yields and Treasuries is now the widest since March.

Investor opinions varied on whether this recent selloff is a buying opportunity or not.

Ulrich Urbahn, head of multi-asset strategy at Berenberg Bank, said losses will be limited and the market’s nervousness will fade after the U.S. election and once a Covid-19 vaccine is approved.

Not everyone agreed with that optimism. Suzanne Hutchins, a portfolio manager at Newton Investment Management, cut back her equities allocation last week and is short U.S. stock futures.

“There’s quite a lot of uncertainty, which destabilizes asset prices,” she said. “I wouldn’t get out of equities, but I would reduce exposure.”

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