European stocks drop as renewed virus concerns hit sentiment

Monday morning proved a miserable start to the week for European equities with surging coronavirus cases sparking further concern about the economic recovery and bank shares under renewed selling pressure.

The bloc-wide Stoxx 600 fell 1.9 per cent, Germany’s Dax lost 2.3 per cent and the UK’s FTSE 100 shed 2.5 per cent in early dealings, with the European banks index extending last week’s losses to fall to its lowest level since May. US stock futures also fell, with those tracking the benchmark S&P 500 off about 1 per cent.

Anxiety about rising coronavirus infections has gripped economists and politicians in recent days, with countries including the UK having imposed stricter social restrictions in some regions, and eyeing tougher action still.

“We do expect the pace of recovery to slow over the next several quarters in most if not all economies as the virus spreads faster with the arrival of cold weather in the northern hemisphere, and thanks to a likely halt in US fiscal support until after the election this November,” said analysts at Deutsche Bank.

Travel and leisure shares were among the biggest fallers during Monday’s trading session, with the Stoxx index tracking the sector down 4.1 per cent.

Shares in lenders also fell sharply after the International Consortium of Investigative Journalists and other media organisations including BuzzFeed alleged that international banks had flagged up suspicious transfers worth more than $2tn to US anti-money laundering authorities between 1999 and 2017.

Banks including Lloyds Banking, Barclays and HSBC slid in early morning trading, with HSBC’s London-listed shares falling 3 per cent to their lowest point for more than 20 years.

Bank shares have taken a heavy blow in recent months as low interest rates have depressed the profits they earn from lending and concerns have swirled over the trajectory of the global economy.

European policymakers are debating the future of pandemic stimulus programmes, with the European Central Bank having initiated a review of its bond-buying programme and the UK’s Treasury planning to announce an extension of its business support loan programme on Monday. The UK government is also under pressure to decide whether to extend the furlough scheme beyond October 31.

Nevertheless, many fund managers are betting on a quick recovery: all but a small minority of 186 investors and strategists surveyed in September by Absolute Strategy Research expected corporate earnings to be higher in the next 12 months, equities to beat bonds and cyclical stocks, such as retailers and carmakers, to outperform defensive stocks. The survey is the most optimistic since December 2016.

“I’m surprised at how much optimism is embedded in the survey. I don’t think we expected it to be quite so robust,” said David Bowers, ASR’s head of research.

An EU summit later in the week is likely to focus on the developing pandemic, Brexit negotiations and how better to crack down on tech giants that operate in Europe and are deemed to have excessive market dominance.

Asian markets were also under pressure as the week began. China’s CSI 300 fell 1 per cent and Hong Kong’s Hang Seng index fell 1.6 per cent, with Hong Kong-listed shares of HSBC down 4 per cent to their lowest point for more than 25 years.

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