European Stocks Near Bull Market in Longest Rally Since November
Europe Stocks Gain 20% From 2020 Low on Optimism Virus Slowing
(Bloomberg) --
European equities rose in their longest rally since November, ending the day on the verge of entering a technical bull market, as investors focused on the slowing of new virus cases in key regions and looked ahead to the earnings season.
The Stoxx Europe 600 Index climbed 0.6%, taking its gains since a March closing low to 19%. It had rallied as much as 1.4% earlier in the day. Germany’s DAX Index rose 1.3% as trading on Deutsche Boerse resumed after being halted earlier because of technical problems.
“The market seems to have found a level it is comfortable with at the moment,” said Christopher Hiorns, a fund manager at Edentree Investment Management Ltd.
“I can see it continuing to recover from here in the short term, especially after some countries in Europe seem to have experienced a peak in new cases and we get some clarity over when the lockdowns may start to ease,” he added. “But there is still a long path to go as we don’t know how long some restrictions might last before things get back to normal. We can also expect a lot more bad news from companies with many likely to breach banking and loan covenants.”
Equities rallied Tuesday after data showed China’s trade performed better than expected in March and as the rate of new infections eased from New York to Spain. The Federal Reserve kicked off its commercial paper-buying facility, saying funding stress has reduced across a number of markets in the past two weeks.
While the Stoxx 600 closed at the highest level since March 10, it’s taking European stocks longer than the U.S. to climb out of a bear market. The S&P 500 returned to its bull territory last week as the Fed stepped up its response to the fallout from the pandemic. In Europe, the scale of the damage from the virus is shining a light on the vulnerabilities of the region’s union and the challenges of coordinated action. Bloomberg’s monthly survey estimates the euro-area economy will contract more than 10% in the January-June period.
“Europe is lagging simply because investors don’t seem to think governments and regulators have the same willingness and capability to stimulate in the magnitude that we have seen elsewhere,” said Nathan Thooft, Manulife Investment Management’s head of global asset allocation. “It’s all relative and perhaps even misconceived but perception and sentiment is real.”
Despite the rebound in European shares, the Stoxx 600 remains about 23% below a record high that it reached on Feb. 19, just before worries about the spread of the pandemic outside China triggered a market rout.
The European earnings season kicking off this week will offer more clarity on the impact of the virus-led lockdowns on corporates, with market players carefully watching for dividend and buyback cuts as well as reduced profit projections.
On Tuesday, health-care shares were among the biggest gainers among industry groups, with AstraZeneca Plc rallying as it plans to start testing one of its new cancer medicines to see whether it can quell the excessive immune response the new coronavirus triggers in some patients.
Still, some investors remain skeptical that the rally has legs. The International Monetary Fund today predicted the “Great Lockdown” recession would be the steepest in almost a century, with global gross domestic product shrinking 3% this year.
“We believe that we are in the middle of the greatest economic crisis in nearly a century and unprecedented social disruption, are we missing something from the market?” said Alberto Tocchio, chief investment officer at Colombo Wealth SA, who has been selling equities over the past 10 days. “The recovery might turn out to be too slow for the bulls and their current expectations.”
U.K. equities underperformed their continental peers, with the FTSE 250 gauge of mid-cap stocks tumbling 2%. The lockdown measures are expected to be extended this week in the U.K. and the Office for Budget Responsibility warned that the British economy could shrink 35% in the second quarter.
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