• York Investment & Finance

Global Markets Overview: Western Europe

By John Taylor, Analyst at the York IFS Global Market Telegraph

From 22 September to 6 October 2020

European shares plunged, recording their worst week since June. The sell-off was mainly down to a surge in coronavirus cases across Europe with many governments imposing additional restrictions. The pan-European STOXX Europe 600, Germany’s Xetra DAX and France’s CAC 40 Index all ended the week lower by 3.60%, 4.93% and 4.99% respectively.[i]

Investors’ concerns rose over further restrictions that could cause the pace of economic recovery to slow down across Europe. France, Spain and southern Germany all took additional measures to contain the spread of coronavirus infections. However, there has been reluctance from many regions to go back into full lockdown. The conservative regional administration in Madrid defied the national left-wing government, who placed restrictions on residents’ movements in the city, even though once again it is at the epicentre of Spain’s coronavirus outbreak.[ii]

Initial data from IHS Markit’s Composite Purchasing Managers’ Index (PMI) affirmed investors’ worries that Eurozone activity declined in September. Additional restrictions on travel has hampered demand in the service sector with the PMI for services falling to 47.6 from 50.5 in August, recording its lowest level since May. As services are the Eurozone’s dominant sector this indicates that recovery may have stalled across the region, with many economists warning of potential risk of a double-dip recession.[iii] Markets remain fragile with high uncertainty for investors over the impact of Brexit, US election and the pandemic.

Brussels renewed its threat to take legal action over the UK government's plans to amend the Brexit deal preventing a hard border with Northern Ireland. The EU said it will continue to participate in trade deal talks, however, renewed vows not to renegotiate the withdrawal agreement.[iv] Last week, a leading German economic research institute projected that more than 700,000 jobs could be at risk for EU companies exporting to Britain if there is a no-deal Brexit scenario later this year.[v] The scale of the potential job losses illustrates how crucial a deal is for both sides.

The ECB has urged the EU to consider making its new pandemic recovery fund a more permanent part of policymaking, as it published data on which countries would be the biggest beneficiaries and those that would carry a net loss from the scheme. Croatia, Bulgaria and Greece are all projected to gain a net 8 percent of their 2019 GDP. The biggest losers include the frugal four, who initially opposed the new fund, and Germany, which will all lose approximately 2% of last year’s GDP.[vi]

The European bank index (SX7P) sank to record lows this week after leaked documents showed that lenders, such as HSBC and Standard Chartered, had moved and laundered around $2 trillion worth of illicit funds over a two-decade period. The sector has already taken a huge hit from coronavirus with historically low interest rates and a rise in bad loans. Furthermore, the ECB's decision to stop dividend payments by European banks until 2021 has hampered investment into the sector with investors looking elsewhere for higher returns.[vii]

This article was first published in University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 9.1 in early October 2020.

Reference list: [i] https://www.troweprice.com/personal-investing/resources/insights/global-markets-weekly-update.html#europe [ii] https://www.ft.com/content/5d46d911-aa45-408e-a14e-b4b82a75fd6d [iii] https://www.ft.com/content/1c427f89-f9ad-461b-a445-4b0011dcbc9d [iv] https://www.ft.com/content/75e3b3aa-757a-4ad2-968d-103354a7d3e3 [v] https://www.ft.com/content/18ff26dc-b4c1-406d-ab68-2eacf24944b7 [vi] https://www.ft.com/content/5bc6dd62-51e3-414c-b815-5f964cb616db [vii] https://www.barrons.com/articles/more-bad-news-for-european-banks-as-leaked-documents-show-alleged-movement-of-illicit-funds-51600704744

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