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Stocks tumble as health woes intensify, dollar rallies

CMC Markets

European stocks have endured a brutal wave of selling today as coronavirus concerns prompted dealers to dump stocks. 

Europe

There is a feeling in the markets that governments are not in control of the pandemic and that is why traders are running scared. The number of new covid-19 cases is rising at an alarming rate and the increase in the hospitalisation rate is a worry too. Several European countries have announced tougher restrictions this week, including Spain and France. Today, it was reported that Germany will commence a ‘light’ lockdown next week, and that rocked sentiment because Germany was seen to be relatively in control of their situation. To add to the bearish news, it was the confirmed that there will be no US coronavirus stimulus package agreed upon before the presidential election. The update wasn’t a total shock as hopes were fading recently.   

Deutsche Bank AG revealed its third quarter numbers this morning and the German finance house swung to a profit of €182 million from €942 million loss last year, and keep in mind that equity analysts were expecting a loss of €26 million. The fixed income trading division performed very well as revenue jumped by 47% to €1.8 billion, easily topping the €1.39 billion forecasts. In the three month period, Deutsche set aside €273 million for bad debt provisions, while it has already set aside €761 million this year. The tapering off in credit loss provisions and the robust trading performance have been common themes of the latest banking reporting season in Europe and the US, but the German finance house remains a little on the cautious side – it reaffirmed its guidance for full year credit losses. The bank anticipates that the economic recovery will continue at a much slower pace over the coming quarters. In addition to that, the ongoing risk with respect to Covid-19, the downside risks have materially increased.

Next shares have bucked the wider negative trend thanks to a respectable set of third quarter numbers. Full price sales in the quarter increased by 2.8%, exceeding expectations. Total sales, including markdowns, ticked up by 1.4%. The fashion house revised upward its full year profit forecast again. It now predicts that earnings will be £365 million, an increase of £65 million from the previous guidance. Not surprisingly, the group’s high street business suffered and sales fell by 17.9%. The online department counteracted the poor retail performance as sales jumped by 23.1%.

Carnival, the cruise operator, announced that it pushed back the restart date for cruises from Australia and New Zealand until May 2021.

Aston Martin shares are in demand on the back of the news that Mercedes Benz will increase its stake in the company up to 20%. The high end car manufacturer has struggled ever since it listed on the London stock market in October 2018 and it has undergone several capital raisings. Aston also raised £125 million from an equity issue – the news shares issued equated to 13.7% of the share capital. At this rate, it seems that the institutional investors are pouring funds into the car marker as a way of trying to protect their original investment.  

US

The sell-off on Wall Street isn’t as severe as that in Europe, but it is bad all the same. The usual fears about new coronavirus cases and the increase in the hospitalisation rates are hammering sentiment. In the past few months, there has been consistent talk about the Democrats and the Republicans potentially brokering a relief package before US voters go to the polls. It kept US indices relatively elevated, but now those hopes have been dashed, so the mood is extra downbeat.  

General Electric shares are higher this afternoon as the company posted a surprise third quarter profit. EPS was 6 cents, and equity analysts were expecting a loss per share of 4 cents. Revenue was $19.42 billion, topping the $18.73 billion forecast. The company confirmed that revenue from health care, power and aviation fell by 7%, 12% and 54% respectively.

Microsoft revealed respectable first quarter numbers last night. EPS was $1.82, and that comfortably exceeded the $1.54 consensus estimate. Revenue rose by 12% to $37.15 billion, which was slightly above forecasts. Azure, the cloud division, posted a 48% surge in revenue and that topped the 44% that traders were expecting. The figures were solid but the second quarter revenue guidance was a little shy of forecasts, and it seems that traders latched onto the guidance, especially in the current bearish climate.           

FX

GBP/USD and EUR/USD are in the red because of the rally in the US dollar – the greenback is in high demand because of the risk-off mood in the markets. Lately, the US dollar has attracted safe-haven flows, and seeing as dealers are dumping stocks because of the health crisis, the currency is outperforming. There was only a couple of noteworthy economic announcements from the eurozone today. German import prices fell from -4% in August to -4.3% in September, and that could be a product of weaker demand. French consumer confidence for October dipped to 94, from 95 in the previous reading.

It was reported that progress made in relation to the UK-EU trade talks and that it is possible that a deal might be achieved in mid-November. This is an encouraging development as major uncertainty still looms. The move in the pound has been relatively muted, but that is probably because of the dollar’s dominance due to the health crisis. 

USD/CAD has surged thanks to the broad rally in the dollar, and the sell-off in oil. The Canadian dollar is sensitive to the moves in the energy market so ‘the loonie’ has been dragged lower by the tumble in the oil market. The Bank of Canada (BoC) kept rates on hold at 0.25%, meeting forecasts. The head of the BoC, Tiff Macklem, mentioned making an adjustment to the quantitative easing programme.         

Commodities

Gold has been hit hard by the rally in the dollar. The metal is traded in US dollars, so the upward move in the greenback has made it relatively more expensive to purchase the commodity. Recently, the inverse relationship between the two markets has been robust and that is the case today. If the negative move continues, it might target $1,848.

WTI and Brent crude were already driving lower due to the concerns about the pandemic and demand. Dealers were dumping oil as they took the view that demand is likely to decline on the back of the growing health crisis. The latest energy information administration report showed that US stockpiles jumped by 4.2 million barrels, while the forecast was for only a 1.25 million barrel rise.