Perhaps not surprisingly after a weekend of fresh headlines about surging infection rates across Europe, and partial lockdowns and curfews being imposed in Italy and Spain, European markets have fallen sharply on the open, though the FTSE 100 is outperforming, helped in some part by its more international flavour, and a slightly weaker pound.
UK stocks are also being helped by weekend reports that saw UK/EU trade talks extended into November, on hopes that a deal could well be in the offing. This is especially important for both sides given the directional of travel of the virus. With virus cases already at record levels in the UK, and across Europe, neither side is in a position to inflict such a damaging self-inflicted wound at a time when all energies should be directed at containing the economic damage of the virus.
In an impending sense of déjà vu, markets appear to be reacting to the possibility of a repeat of the scenes in the early part of this year where thousands of people died, as hospitals became overwhelmed as a result of surging virus cases, with fears that fresh lockdowns could crush economic activity. The situation in Italy and Spain is especially worrying given that their respective economies are already buckling under the strain of events in the spring, and can ill afford a repeat. With the European Central Bank meeting later this week, and the EU’s own pandemic fiscal plan still not ratified by EU leaders, pressure is likely to grow on the ECB to act as a bridge to next year in respect of supporting both the Spanish and Italian economies, as well as the rest of Europe as infection rates soar to new record levels.
Against this backdrop and the fact that winter flu season hasn’t even begun, travel and leisure stocks have seen sharp falls on the open, with Lufthansa, IAG, Air France KLM all opening sharply lower, though we have recovered off the lows of the session. Rolls-Royce shares have also slipped back. Royal Dutch Shell and BP shares are also under pressure on the back of the weaker oil price.
German software giant SAP shares also plunged over 20% on the open, after the company cut its revenue outlook for 2020, saying that they expect demand to remain constrained well into 2021. The company also said it is well advanced in looking to list its Qualtrics software unit. In more positive news, Bayer has announced that it will be acquiring Asklepios Biopharmaceutical for as much as $4bn as it looks to augment its gene therapy business.
UK banking stocks are outperforming ahead of their latest Q3 updates later this week, with NatWest Group, HSBC and Lloyds all edging higher. AstraZeneca shares are also slightly higher after it was reported that their latest vaccine candidate produced a strong immune response in older people, with hopes rising of a vaccine in the early part of 2021.
The weekend surge in coronavirus cases has also clobbered oil prices, which have fallen below last week’s lows, over concern that further restrictions will crush demand even more than it already has. The US dollar has been the main beneficiary of the negative start to the week, gaining across the board, while the Norwegian Krone, and the Canadian dollar, losing the most on the back of the weaker oil price, while the euro is also feeling the pressure ahead of this week's ECB meeting.
US markets are also set to open lower, with US Covid cases surging to record levels, while US policymakers continue to procrastinate over a new fiscal stimulus plan, with US voters being used as pawns, to a political class who seem oblivious to events taking place outside their Washington DC bubble. It is now increasingly unlikely that we will see a plan get passed before the end of this year, with expectations now being pushed back to the end of Q1 next year.