By Michael Msika and Jan-Patrick Barnert, Bloomberg market commentators
The mood in the market is decidedly anxious. Worries are mounting that risks from tightening restrictions in Europe to U.S. election uncertainty will snowball, pushing stocks over the edge in a repeat of February’s selloff. Strong gains at the start of October have given way to losses, and previous winners such as tech shares are signaling a shift in sentiment.
The Stoxx 600 has already lost 2.7% this week and futures are signally another sharp drop today. After months of going nowhere, the momentum in the market is now to the downside. The proportion of stocks with MACD sell signal has been rising steadily this month and is highest since August.
Instead of the V-shaped economic revival many had hoped for, the final months of the year may bring more turmoil. New lockdowns are threatening Europe’s nascent recovery, U.S. election uncertainty is reaching fever pitch and the country’s fiscal stimulus talks are dragging on. Meanwhile, the ongoing earnings season has brought little relief.
For the first time since June, technology isn’t the leading industry in Europe this year. While the sector had faced challenges in recent weeks, SAP’s dismal outlook was the final blow that triggered Monday’s worst slump since March. All Stoxx 600 sector gauges are in the red for 2020, with the exception of the personal care, drug and grocery stores index.
“If this situation remains, investors are likely to increase their trading exposure towards safe havens like the yen, the dollar, or even treasuries while equities will continue their bearish correction,” says ActivTrades technical analyst Pierre Veyret. Technically, Euro Stoxx 50 futures look vulnerable, with the June low support being tested.
The earnings season will offer clues on corporate health. Sectors such as tech carry the load of high expectations, and therefore bigger potential for disappointment, while the value part of the market has so far fared better than expected, with positive updates from banks and energy stocks.
Germany’s DAX Index, which had outperformed the broader Stoxx 600 and even the U.S. S&P 500 in the market rebound, was hammered on Monday because of the rout in SAP, which has an almost 10% weight in the benchmark. “Investors have been caught on the wrong foot,” says Comdirect Bank strategist Andreas Lipkow. Tech stocks were seen as a safe bet, he says, but now investors and analysts alike need to adjust their projections.
“The sell-off looks like a downshift in the cyclical rally sparked by developments in Europe,” says Nomura quantitative strategist Masanari Takada, noting that the “unbroken rally” in cyclicals in the U.S. and Europe since late June may have finally run out of steam. The strategist says the rally may not get going again unless a catalyst triggers a pick-up in economic growth.
Takada sees the recent downtrend in sentiment as a “reversion to reality” after “overdone optimism,” driven by the drop in the economic surprise indexes for major economies. Additional selling pressure on cyclicals may have arisen from hedge funds liquidated their long positions on European stocks, he said.
“To some extent, October feels like February all over again as the solid growth picture could once more be derailed by lockdown measures,” says Florian Ielpo, Head of Macroeconomic Research and Multi-Asset Portfolio Manager at Unigestion, raising the odds of a “W” recovery scenario. While it’s so far limited to Europe, a similar situation extending to the U.S. would be a game changer, he says.