Europe’s stock markets

The Dam Breaks in Europe

Europe’s stock markets were on course for their worst day in over three weeks on Thursday, as the tightening of measures across the Continent to bring the Covid-19 pandemic back under controlled investors to abandon hopes of a recovery in the near term.

By 5:35 AM ET (0935 GMT), the benchmark Stoxx 600 was down 8.4 points, or 2.3%, at 326.24, its lowest in two weeks. The German DAX led the losses with a 3.0% decline, while France’s CAC 40 fell 2.4% and the U.K. FTSE 100 fell 2.3%. 

The euro, meanwhile, fell 0.3% to a two-week low of $1.1707 against the dollar, while the yield on the German 10-Year bond, the continent’s risk-free benchmark, plummeted to its lowest since March, at -0.62%.

The latest catalyst for the sell-off was the imposition of a curfew on major cities in France, where new infections are running at a rate of over 22,000 a day.  That fed into a building narrative that European governments are behind the curve in stopping the virus’ spread, reluctant to engage in another bout of economic self-harm with more stringent lockdown measures.

“I’m not satisfied,” Der Spiegel reported German Chancellor Angela Merkel as saying late on Wednesday after a meeting with regional politicians.

 Such measures as had been agreed “aren’t hard enough to prevent disaster,” Merkel reportedly said. Similar struggles are playing out across Europe. In the U.K., cities such as Manchester are fiercely resisting central government’s attempts to impose the toughest of three new levels of restrictions on non-essential activity. That is stoking grievances and public defiance in neighbouring Liverpool, which is already under tier 3 restrictions. The U.K.’s chief scientific advisor has already dismissed Prime Minister Boris Johnson’s new system in much the same terms as Merkel used on Wednesday   In Spain, central government has had to impose a state of emergency in the capital Madrid after it overturned in court initial measures aimed at fighting the virus.

The fear of ever-tighter measures is a very clear negative for Europe’s stock markets, which are more heavily weighted to cyclical stocks than to growth and momentum stocks. The STOXX Automobiles & Parts index fell 3.9% in early Thursday trading, while the Stoxx 600 Banks index fell 2.6%. Ryanair (LON:RYA) shares fell 3.5% after the continent’s biggest airlines said it will cut its winter schedule more than it first planned, to only 40% of capacity. More troubled travel stocks, such as Europcar (PA:EUCAR) and Norwegian Air Shuttle ASA (OL:NORR), skidded closer to zero.

As in the U.S., there is a world of difference between the present wave of the pandemic and the first one that hit in the spring. Higher infection rates are to a large degree the result of greatly expanded testing.  The virus is also more present in younger people who are less likely to require hospitalization or suffer lasting harm.  In Italy, which had the worst first wave in continental Europe, number of Covid-19 patients fell from a peak of over 4,000 in April to only 38 in July. It has now returned to 539, as of Wednesday.

That the number of extreme outcomes is still low compared to spring levels is often lost in an increasingly heated debate that pits the economy against public health. But for all the differences from the first wave, one truth remains unchanged. Markets are vulnerable whenever the pace of virus spread accelerates, which is something it is doing all across Europe right now. No amount of stimulus, fiscal or monetary, will change that.

On the technical front, STOXX 50 on hourly charts, RSI is at 20.59 and suggests that the index is in the oversold area. The current price is below all moving averages. The stochastic is forming an upside crossover. The overall trend is negative, but due to the drastic fall, there might be some short-covering. Therefore, a short term Buy trade can be initiated with the following strict Stop loss & Targets.

TRADE-STOXX 50: Buy at 3180,Target  at 3191 , Stop Loss at 3175