European Stocks Post Worst Monthly Drop Since March on Lockdowns

European equities on Friday trimmed their worst monthly drop since the March turmoil as underwhelming results among U.S. technology giants added to concerns about new lockdowns and upcoming U.S. elections.

The Stoxx Europe 600 Index closed up 0.2% after losing as much as 0.9% earlier in the session and bringing this week’s loss to 5.6%. Energy stocks were the key gainers, with Total SE advancing after posting third-quarter profit that exceeded the highest analyst estimate and Royal Dutch Shell Plc rising after yesterday promising more cash for shareholders. Prosus NV surged as it plans to buy back a combined $5 billion of shares in itself and its South African parent, Naspers Ltd.

ASML Holding N.V. and STMicroelectronics NV dropped after Apple Inc. reported fourth-quarter iPhone revenue that trailed analyst estimates and a drop in China sales. The Nasdaq 100 led losses among major U.S. stock gauges after Apple Inc.’s iPhone sales and Twitter Inc.’s user growth both missed estimates. This signals that market players are worried that the gains in tech giants -- the key drivers of the U.S. stock market rally since March lows -- may have gone too far.

“The market expectations are sky high for big tech companies, especially after the strong outperformance this year,” said Ulrich Urbahn, head of multi-asset strategy at Berenberg Bank. Amid new European lockdowns and fears over contested U.S. elections “expectations of economic recovery have deteriorated,” he added.

European Stocks Post Worst Monthly Drop Since March on Lockdowns

European stocks have been under pressure this week, sinking to the lowest since May, as new lockdowns and restrictions in Germany and France risk halting the nascent economic recovery. Investors may also have taken profit ahead of the Nov. 3 U.S. election amid fears that the result may be disputed, fueling market volatility and uncertainty. At the same time, Morgan Stanley strategists today said that European stocks may be nearing a trough similar to the one in March if investors start focusing on the future reduction in Covid-19 cases.

“It is worth noting that the implementation of national lockdowns back in March actually coincided with a trough in equity markets in both Europe and the U.S.,” said Morgan Stanley strategists led by Matthew Garman. “Whether such lockdowns are as successful in reversing Covid cases at the beginning of winter as they were at the end remains to be seen, however they may still prove a positive signal for stocks if investors ultimately equate more lockdowns today with fewer cases tomorrow.”

In an another sign that investors are fleeing European equities, Bank of America Corp. and EPFR Global data showed that European stocks funds saw their largest outflow in 19 weeks with $3.4 billion in the week through Oct. 28. The Stoxx 600 index is down 5.2% in October, the steepest slide since March’s 15% plunge.

As the third-quarter earnings season reaches its halfway mark, according to JPMorgan Chase & Co. in Europe 70% of Stoxx 600 companies have exceeded earnings-per-share estimates, the highest proportion of beats since the strategists started tracking the data a decade ago. The analysts also note that while only a small share of companies have missed EPS estimates in the U.S. and Europe, their stocks are being “severely punished” by the market.

Among the biggest decliners today, Novo Nordisk A/S fell after missing earnings estimates in the third quarter as the Danish drugmaker grapples with the impact of Covid-19.

©2020 Bloomberg L.P.

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