European markets tumbled after sharp rises in coronavirus cases across the continent prompted concerns about new lockdowns, dealing a heavy blow to bank and travel shares.
The UK’s FTSE 100 fell 3 per cent in early trading. Shares in British Airways owner IAG declined 12 per cent, while Trainline shares lost 9 per cent and InterContinental Hotels shares slipped 5 per cent.
Europe’s Stoxx 600 dropped 2.6 per cent, leaving it on track for the steepest decline since ructions in June. Germany’s Dax fell 3 per cent, with the European banks index extending last week’s losses to reach the lowest level since May.
The sell-off is “mainly down to what’s happening in terms of Covid-19 and potential second lockdowns,” said Artur Baluszynski, head of research at investment manager Henderson Rowe.
Europe is a “bank-financed economy. If banks are struggling, the economy is struggling. And banks will be if we get another lockdown, or tighter restrictions,” he said. Lenders will be extra cautious about who they lend to in the face of a worsening pandemic, and those that “loaded up” on commercial property before the pandemic are likely to suffer from the decline in the value of office space, he added.
The decline of travel and leisure shares reflected persistent rises in coronavirus cases around the world and the prospect of tighter lockdown restrictions, including in the UK. US stock futures fell, indicating that the S&P 500 will drop about 1.8 per cent when it opens later in the day. The yield on the benchmark 10-year US Treasuries slid to 0.66 per cent, indicating rising demand for haven assets.
“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.
Shares in banks fell sharply, in part reflecting the long-running pressure on bond yields and the prospect of a lengthy period of near-zero interest rates. But pressure intensified 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. HSBC’s London-listed shares fell 6 per cent to their lowest point for more than 20 years, while the bank’s Hong Kong-listed shares sank to their lowest point for more than 25 years.
Dickie Wong, head of research at Kingston Securities, said the ICIJ report had added to a host of issues that were undermining investor demand for HSBC’s shares, including its announcement in April that it would end dividend payments.
The bank’s Hong Kong-listed shares dipped below HK$30 on Monday, a level they did not even breach during the global financial crisis: “Even individual investors have already given up on the stock”, Mr Wong said.
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 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.
The downbeat start to the week’s trading may come as a shock to many fund managers, who have increasingly been betting on a rapid global economic 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 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 declined 2.1 per cent.