UPDATE 2-European shares brace for worst day since 2016 as virus risks grow

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(For a live blog on European stocks, type LIVE/ in an Eikon news window)

* Traders wipe $420 billion in companies’ value

* Airlines lead declines on STOXX 600

* German shares shrug off pick up in business morale

* ECB interest rate cut bets rise (Adds comment, updates prices)

By Sruthi Shankar and Sagarika Jaisinghani

Feb 24 (Reuters) – A surge in coronavirus cases outside China wiped nearly $420 billion off the value of European stock markets on Monday, as investors sought the perceived safety of gold amid fears of a greater impact on global growth.

A 4.2% slump put Milan shares on course for their worst day since 2016, as Italy reported the biggest flare-up of the virus in Europe with four deaths and more than 150 infections.

The pan-European STOXX 600 dropped 3.4% and was on track for its biggest intra-day percentage slump since Britain voted to exit the European Union in June 2016.

London’s main index was down 3%, with oil and travel stocks among the biggest decliners, even as the rate of infections in China dropped and the country relaxed restrictions on movement in several places including Beijing.

“The key debate is how much fear spills over into reality,” said Chris Bailey, European equity strategist at Raymond James in London.

“China is starting to stabilise, but clearly now there are direct impacts on economies as well as the continuing supply chain impacts.”

Airlines were among the worst performers on the STOXX 600, with EasyJet, Ryanair, Air France and Lufthansa down between 7.4% and 12.6%. Europe’s travel & leisure index tumbled 5.4%.

Broad-based declines on the index sent luxury goods makers, miners, automakers, chipmakers and banking shares – which all tend to be tightly sensitive to expectations of global growth – down between 4% and 5%.

“Today makes it very clear that markets have been overly optimistic,” said Teeuwe Mevissen, senior market economist at Rabobank. “Chances have certainly increased that we might be on the brink of (a) reversal of (the) long term trend.”

Both European and U.S. stock markets have been on a decade-long bull run since the financial crisis, and the benchmark European index was trading at record highs as recently as last Wednesday, confident that central banks would ease policy if need be to shield markets from the coronavirus fallout.

Stocks are down 5% since, putting them in negative territory for the year and bolstering expectations – already at 50% – that the European Central Bank will cut interest rates by 10 basis points in July.

German shares, tightly linked to China by its export strength, were also down 3%, shrugging off an Ifo survey that showed business morale rose unexpectedly in February, easing recession fears in Europe’s largest economy.

Primark-owner Associated British Foods slid 1.7% as it warned of potential supply shortages on some lines later in the 2019-20 financial year if delays in factory production in China are prolonged due to the outbreak.

Juventus slumped 9.3% after the Serie A leader posted a net loss of 50.3 million euros in the first half, compared to a profit a year earlier.

Bank of Ireland fell 4% after its underlying pretax profit fell for the fourth successive year and the lender added it would take longer than forecast to hit a return on tangible equity (ROTE) above 10%. (Reporting by Sruthi Shankar in Bengaluru; Editing by Sriraj Kalluvila and Patrick Graham)

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