European Stocks Fall amid Renewed Fears over China’s Covid Curbs

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After gaining for five weeks in a row, European stocks opened the week lower amid concerns over China’s tightening of “Covid Zero” restrictions.

At around 08:03, the Stoxx Europe 600 fell 0.2% in early trading on Monday. Reports showed that mining and travel and leisure stocks dropped the most, falling 1.4% and 0.5%, respectively. Industrial goods and services also sank.

Health and public services, considered defensive sectors, rose in early trading on Monday.

However, Julius Baer fell another 0.5% even after the bank stated that it had managed the “challenging market” impact on its assets under management to be on track to meet its 2022 profitability targets.

London’s FTSE also plunged 0.5%. However, European stocks were not the only ones affected. Contracts tracking Wall Street’s benchmark S&P 500 index fell 0.4%.

Also, those that follow the tech-heavy Nasdaq 100 lost 0.3% on Monday morning.

Asian stocks also fell 1.3% on growing concerns over the Covid-related restrictions’ impact on the economy.

Hong Kong’s Hang Seng Index fell 1.9%, and China’s CSI 300 lost 0.8%. Also, while Japan’s Topix rose 0.3%, South Korea’s Kospi lost 0.8%.

The plunge in global stocks comes after the first coronavirus-related death in six months raised concerns in China. Many believe that Beijing can take a step back and return to the strict restrictions that put the country under an inflexible lockdown during the pandemic.

In addition, a city near Beijing closed schools and universities, asking residents to stay home for at least five days.

Originally, the city was thought to be just a “test case” to allow the government to dispense with the restrictions.

Markets also appear to be reflecting investors’ reactions to inflationary pressures and potential US central bank interest rate hikes.

European stocks had rallied for the past five weeks in what was the longest winning streak in the past year. Reports of lower-than-expected inflation in the US and China’s reopening plans fueled the rises.

On Friday of last week, European markets closed higher as investors evaluated the Federal Reserve’s plans for its monetary policy after some officials made harsh statements about the next measures to control inflation.

Despite closing below the threshold, the leading Euro Stoxx 50 gauge rose 20% above this year’s low briefly on Friday.

It became the second major European gauge to enter a bull market after the DAX gained 0.5% following a 20% rally from its low last Tuesday.

The market reflected global investors’ hopes that the US central bank would rein in its aggressive interest rate hikes due to lower-than-expected consumer and wholesale inflation numbers in October.

However, even as traders took advantage of the lower valuations, other risks still appear to be lurking and influencing the market, including the potential further central bank tightening, recession risks, and the energy crisis.

Berenberg’s head of multi-asset research and strategy, Ulrich Urbahn, said whether or not the year-end rally will continue depends mainly on the next inflation report and the Fed’s reaction in mid-December.

Furthermore, even as hopes of seeing China reopen recently prevailed, doubts about a change in the country’s Covid policy have started to surface again, adding to the volatility, Mr. Urbahn stated. He also explained that investors need to know what happens first, whether the Fed raises interest rates or Beijing pivot.

Meanwhile, strategists at Goldman Sach Group Inc. have warned investors that shares are likely to see further declines this year, claiming the bear market was not over.

Experts said the market has not yet reached conditions considered “typically consistent” to suggest otherwise.

The week also brought lower prices in the energy industry, with oil prices falling sharply on Monday after heavy losses last week. The international benchmark, Brent crude, was down 0.9% at $86.00 a barrel.

Moreover, the American marker West Texas Intermediate fell 0.7% on Monday, reaching $79.50, after losing around 10% last week.

However, the chief investment officer at UBS Global Wealth Management said Brent crude prices could return to $110 a barrel in 2023 as demand rises and supply tightens since OPEC cut production this month.

Meanwhile, the two-year Treasury yield rose 0.01 percentage point to 4.52% despite government bond markets being sensitive to interest rate expectations. The 10-year Treasury yield also fell 0.01 percentage points to reach 3.80%.

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