February 29, 2024

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European Stocks Retreat on New Infections, Economic Growth Woes

(Bloomberg) — European equities slid again after slumping the most since March last week on lingering concerns about a second wave of infections and the pace of economic recovery.

The Stoxx Europe 600 Index declined 1% as of 10:30 a.m. in London, paring an earlier drop of as much as 2.6%. Cyclical sectors such as travel, miners and oil sectors led losses, while defensives including health-care shares outperformed.

The rally that saw European stocks rise more than 30% from March lows came to a halt last week as Covid-19 cases picked up in more than 20 U.S. states. Value and cyclical stocks have suffered in particular amid concerns that the economic recovery is slower than forecast. Chinese data Monday showed the world’s second-largest economy had a smaller bounce back in May than expected.

“The air should become thinner in the coming weeks” as “much positive has been priced in and positioning is now less cautious,” said Ulrich Urbahn, head of multi-asset strategy and research at Joh Berenberg Gossler & Co. “However, we still believe that the downside is limited given the huge amount of dry powder and the central bank support.”

Urbahn believes that the cyclical rotation is mostly over as strong macro-economic surprises are most likely coming to an end. His comments echo those of JPMorgan Chase & Co. strategists led by Mislav Matejka, who closed their recommendation for value and cyclical equities, adding that without value’s participation, broad market indexes could also struggle as the internal breadth narrows.

U.S. equity futures also retreated, with the S&P 500 e-mini contracts losing 1.9%.

For European stocks, the pullback since reaching a three-month high earlier this month is unraveling a rare period of outperformance over Wall Street. The Stoxx 600 had recouped about two-thirds of the pandemic-fueled sell-off through March, a remarkably rapid recovery.

“We saw the risk-on rally as odd and did not fully understand it and believe it was mainly driven by short players covering positions,” said Uwe Maderer, head of fixed income portfolio management, LBBW Asset Management. It was “an exaggeration to the upside in equities with all good news priced in and risk underrepresented. Now the attention on a second virus wave is back up.”

Some market players, like Sebastian Galy of Nordea Investment Funds, remain optimistic that equities can see another leg up as the U.S. economic growth recovers.

“We remain constructive on our equity outlook,” said Galy, a senior macro strategist. “We would posit a third wave upward in the equity market partially disconnected from fundamentals and driven by the quantitative easing of central banks.”

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