European stocks dropped for the third day in a row, knocking the regional benchmark to its lowest level since May, on mounting expectations of new government measures to slow the spread of coronavirus.

The Stoxx 600 index fell 2.3 per cent after the open on Wednesday and has shed 4.9 per cent since the end of last week as bourses in Frankfurt, Paris and London have endured bouts of selling.

Angela Merkel, the German chancellor, and French president Emmanuel Macron are both expected to announce on Wednesday new restrictions to curb the second wave of the pandemic that is worsening across the continent.

“Across western Europe, confirmed case growth has accelerated rapidly and continues to deteriorate. Positive testing rates and hospitalisation rates have surged across countries as well,” Goldman Sachs said in a note to clients on Tuesday evening.

The spectre of new restrictions, which weighed heavily on economic output during the initial wave of the pandemic this spring and summer, has “severely soured” market sentiment, according to strategists at Italian bank UniCredit.

France’s CAC 40 fell 2.1 per cent in early trade on Wednesday, with the German Dax off 1.9 per cent and the FTSE 100 in London down 1.2 per cent.

US stock-index futures also came under selling pressure during the European morning, suggesting the gloomy sentiment could also spill over to Wall Street later on Wednesday. Futures tracking the S&P 500 index were down about 1 per cent in recent dealings.

American and German government debt also increased modestly in price, suggesting rising demand for the haven assets. The 10-year Treasury yield was down 0.02 percentage points at 0.76 per cent, while its German equivalent fell 0.025 percentage points to minus 0.63 per cent. The dollar ticked up 0.2 per cent against a basket of six major currencies.

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Traders also said the upcoming US election was expected to be a source of tumult in equities markets over the next few weeks. The Vix index, a measure of expected volatility over the next month, traded at 35 on Wednesday morning — well above its long-term average of 20.

“The investment environment has entered a period of greater volatility due to uncertainty regarding the US presidential election on November 3, the timing of an additional US stimulus package, as well as concerns about how rising Covid-19 cases in western countries will impact the economic recovery,” according to the Credit Suisse investment strategy unit.

Via Financial Times