The markets of Europe are facing a lot. European investors started the past week preparing for a Brexit showdown. They finished up getting blindsided by a fresh wave of virus restrictions, in a reminder of the pandemic’s power to thrash markets. The declaration of Paris curfews and London curbs on activity on Thursday was what ultimately drove the Stoxx 600 to its first weekly loss in three and sent the euro to its lowest level so far.
Meanwhile, the fallout from UK Prime Minister Boris Johnson’s self-imposed Oct. 15 deadline for a trade agreement with the European Union was blunted as both sides left room for further talks. “The second wave in Europe is getting bigger and bigger,” Joost van Leenders, senior investment strategist at Kempen Capital Management, said by phone. “Last week, we cut European stocks in favor of emerging markets because of concerns about the second wave of Covid-19.”
A resurgence in infection rates across Europe and UK tops Brexit on the list of worries for investors, according to Bank of America Merrill Lynch’s client survey this month. The pandemic shock on consumption and investment remains the main driver of risk in the eurozone, while for now, Brexit is looking more like a local affair. Just look at the trading action among Europe’s equity investors. On Thursday, eight days of gains were wiped out in one session that saw heavy selling volumes on Euro Stoxx 50 futures. Traders also look to be bracing for wilder swings, with the Euro Stoxx 50’s volatility gauge testing an uptrend and one-month implied volatility climbing above the three-month tenor.