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InvestmentsCOVID comeback threatens fresh setback for European market bulls By Reuters

COVID comeback threatens fresh setback for European market bulls By Reuters


© Reuters. FILE PHOTO: Euro banknote is seen by damaged glass on this illustration taken June 25, 2021. REUTERS/Dado Ruvic/Illustration/File Photo

By Julien Ponthus and Yoruk Bahceli

LONDON (Reuters) -COVID-19 lockdowns have returned anew to hang-out Europe’s financial prospects, forcing buyers 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 below 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, because of a robust earnings restoration.

A pan-European fairness index, up 80% from March 2020, slipped half a % on Friday.

“One thing is certain, if the whole of Europe had to go under lockdown once more, and depending on how long that would last, we would need to rethink our growth scenarios,” stated Stephane Ekolo, a world fairness strategist on the brokerage Tradition.

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 greatest 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 the moment flags a 51% rise for the benchmark, solely marginally beneath 60% in Q3.

It nonetheless compares favourably with predictions of a 21% earnings progress for corporations.

But some ominous indicators had emerged for Europe even earlier than the newest COVID resurgence. European information lags U.S. equivalents by the most important margin in over a yr, based on 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 aware for a few weeks now that this winter will be difficult and that the vaccination rollout doesn’t reduce lockdown risk by 100%,” stated Emmanuel Cau, head of European fairness technique at Barclays (LON:).

The setback, if it deepens, will show painful to many. BofA’s broadly adopted month-to-month investor survey confirmed funds most bullish on euro zone equities, with a 33% “overweight” and EU banks particularly in favour.

Cau says it’s too early to see the lockdowns as a gamechanger and that buyers are reserving earnings off current scorching rallies. And deeply unfavorable inflation-adjusted bond yields most likely signifies that the tsunami of money chasing international shares won’t ebb fully.

And there will likely be winners: healthcare shares rose 1% on Friday, whereas the expertise sector gained 0.6%.

BUND BOOST

Investors made a beeline for bonds, turning Germany’s complete yield curve unfavorable 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 buck.

“It’s just building, that story of the pandemic not being quite over in Europe and that’s a knee-jerk flight to quality,” stated Peter McCallum, charges strategist at Mizuho.

“The more that becomes a theme and we get the market thinking about a dovish ECB….we’ve got some room to fill the (10-year Bund yield) gap down to -0.45%,” he added.

Some market watchers are beginning to look past Europe.

Deutsche Bank (DE:) famous that on the cusp of winter, vaccination charges in Austria and Germany at 64% and 69% had been nicely above the U.S. 58% stage.

“Although all the headlines are in Europe at the moment, will the United States be more vulnerable than many European countries over the course of the full winter?” the financial institution wrote.

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