Mounting concerns about a third wave of Covid-19 cases across the UK and Europe are adding to expectations that economies may reopen later than initially predicted.
The shift in market sentiment is weighing on stocks as they are extending losses with covid concerns even overshadowing today’s upbeat PMI data.
“Fears over the impact of tighter lockdown restrictions on the economic recovery are dragging on risk sentiment for a second straight day, even though PMI dated pointed to an encouraging pick up in activity,” said Sophie Griffiths, Market Analyst UK & EMEA at OANDA, this morning.
“The longer the lockdown, the deeper the potential economic scaring,” she added. “The covid crisis dragging on is reducing the likelihood of a strong economic rebound this year.”
There is “no doubt” that a third wave of coronavirus sweeping across Europe will “wash onto our shores”, the Prime Minister said yesterday.
Underlining those concerns, the IFO now expects Germany to see economic growth of 3.7 per cent this year, down from 4.2 per cent forecast just 3 months ago.
However, CMC Markets UK analyst David Madden did stress this morning that “in the grand scheme of things, the declines in stocks are relatively small because even though some countries might need to maintain tight restrictions for a little longer than initially hoped, there is a belief that countries will fully reopen at some point.”
Airlines such as TUI, Wizz Air, Ryanair and easyJet have rebounded following several days of losses, while bargain hunting in the oil market has helped BP and Royal Dutch Shell, he said.
Meanwhile, banks, including HSBC, Standard Chartered and NatWest, are lower due to the dip in bond yields.
“It has been a quiet morning in terms of corporate stories,” Madden noted.
Bellway posted a dip in first half profit but he called the order book “robust.” In the six-month period pre-tax profit was £280.2m, down from £291.8m, with revenues increasing by 11.6 per cent to £1.7bn.
“The lockdowns disrupted construction activity but demand for properties remains robust, partially thanks to the stamp duty holiday on properties worth of up to £500,000,” Madden said.
The government incentive was due to expire at the end of the month but it has since been extended until the end of June.
One of today’s stars, so far, is Softcat. Its shares hit a record high this morning as the group announced it is confident its full year figures will be significantly ahead of previous forecasts.
The IT infrastructure solutions company saw revenue increase from £524.1m to £577m in the first half, gross profit jumped by 20.4 per cent to £134.5m. Also, an interim dividend of 6.4p was announced.
Meanwhile, the CPI reading for February was 0.4 per cent, down from 0.7 per cent in January.
“It greatly undershot the 0.8 per cent that economists were expecting,” Madden pointed out, as he added that the core reading fell from 1.4 per cent to 0.9 per cent, “so it seems that demand took a hit.”
Lately, there have been concerns about rising inflation, he continued, which led to higher bond yields and in turn hit stocks.
“The UK 10-year gilt yield dipped after the CPI numbers were posted, not surprisingly. Since inflation has cooled, that could act as a cap to any potential rallies for sterling as the Bank of England will not be in a rush to tighten their policy,” Madden added.
France, Germany and the UK posted well received services and manufacturing data earlier today as flash updates for March were published.
The UK’s services update was 56.8, a big improvement on the 49.5 registered last month, while France’s services sector continues to be in contraction territory as the reading was 47.8, despite an increase on the month.
Germany’s manufacturing report was 66.6, which Madden called “a stellar reading.”
Meanwhile, GameStop shares fell in post-market trading last night as the group announced that it is considering selling some of its own stock to help finance its transformation, which is expected to focus more on e-commerce.
“The stock experienced enormous volatility in the past two months as it was engulfed in a gigantic short squeeze. Even though things have calmed down, the stock price is still approximately eight times more valuable than prior to the short squeeze saga,” Madden pointed out.
To him, it is not a surprise that the group wants to release some funds from its equity and look to re-organise the business, because in the fourth quarter, e-commerce sales jumped by 175 per cent, which accounted for more than a third of total sales.