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 2.4 per cent in early trading on Wednesday and has shed more than 5 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.
In the UK, data released by the government this week showed that coronavirus cases, hospitalisations and daily deaths were all rising.
“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 and the German Dax both sank 3.2 per cent in early trade on Wednesday, with the FTSE 100 in London down 2.2 per cent.
Bank stocks — which have been among the hardest hit by the pandemic — led the falls despite upbeat earnings this week from lenders including Deutsche Bank and HSBC. The Stoxx travel subsector also fell about 3 per cent, while energy stocks tracked the price of oil lower. Brent crude, the international benchmark, fell more than 3 per cent, reflecting growing concerns over demand, to below $40 a barrel.
US stock-index futures 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 1.3 per cent.
American and German government debt increased modestly in price, suggesting rising demand for the haven assets. The 10-year Treasury yield was down about 0.02 percentage points at 0.76 per cent, while its German equivalent fell 0.026 percentage points to minus 0.63 per cent. The dollar ticked up 0.4 per cent against a basket of six major currencies.
Analysts 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 above 36 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.