By Syndication Washington Post, Bloomberg · Ksenia Galouchko
The Stoxx Europe 600 Index ended the session 2.3% lower, dropping the most since Oct. 2, with miners, airlines, luxury-goods makers and tech stocks taking a serious beating. All industry groups were in the red, signaling just how worried traders were. The U.S. also dropped, with the S&P 500 tumbling as much as 1.9% on Monday morning.
"Fear is the name of the game," said Stephane Ekolo, an equity strategist at TFS Derivatives in London. "Market participants are taking some risks off the table as they are afraid of the potential economic implication of the virus outbreak."
Monday's drop is quite a change from Friday, when the market rallied on optimism that China was moving quickly enough to contain the outbreak. The death toll has now risen to at least 80 people, the infection is spreading around the world, and investors are dumping equities at the start of a week jam-packed with earnings.
"A spike in volatility will add further excuses to sell and to adjust the weight into the end of the month," said Alberto Tocchio, chief investment officer at Colombo Wealth in Lugano. "We are therefore continuing to buy puts on main European and U.S. indexes in order to protect the portfolios."
The Euro Stoxx 50 Volatility Index jumped 36%, the most since Feb. 2018, signaling that traders were unsettled by the rising number of victims from the outbreak. The gauge had dropped to a record low earlier this month.
While Monday's pull-back in stocks was pronounced, all was not lost yet. Technical charts showed the Stoxx 600 remained in an uptrend channel, and trading above its 50-day moving average.
Here are the most affected sectors in Monday's sell-off:
- Shares in luxury-goods makers were hurt by worries that Chinese consumers won't spend as much time shopping during Lunar New Year festivities as they usually do. Kering SA, Swatch Group AG and Burberry Group Plc were among the biggest decliners in the sector.
- "It's very apparent that the last thing on anyone's mind right now is purchasing luxury items," Keith Temperton, a trader at Tavira Securities, said by email.
- While it's too early to draw any firm conclusions on the potential impact on the industry from the virus, disruptive events - especially those affecting consumer sentiment and people traveling - have in the past been "historically good times" to buy into the sector, a team of Exane BNP Paribas analysts wrote in a note.
Airlines and Airports
- The spread of the virus and China's order to suspend sales of package tours in an attempt to contain the outbreak are weighing on travel and leisure shares including airlines.
- Deutsche Lufthansa AG and Air France-KLM shares tumbled as the two airlines are the most exposed to China among European peers, with about 7% of capacity, according to a UBS note; IAG SA also underperformed even as its exposure is more limited. Finnair also sank; the carrier has 10% of its seat capacity exposed to China and a further 38% to other Asian countries, according to Goodbody.
- "This is of growing concern for global long-haul airlines," Sanford C. Bernstein Ltd. analyst Daniel Roeska said in an email. "While low-cost airlines in Europe don't have any exposure, the majors' links to their Chinese partners will make Asia traffic a difficult region in their 1Q," "However, we have also seen that travel can resume very quickly after events like this and I would expect top-line challenges for AF, LHA, IAG only as long as the tragic situation persists."
- Among airport managers, Fraport AG has the highest exposure to Asia, which represents about 10% of the airport's capacity, according to UBS, followed by Aeroports de Paris and Flughafen Zurich AG.
- Shares of European carmakers and suppliers dropped on fears of further weakening in demand in China, the world's biggest automotive market. Car sales in the country fell for a second straight year in 2019 and, while the head of its main automotive industry association is predicting some growth in the market this year, Beijing Automotive Group Co. has said competition is "brutal."
- Wuhan, the virus outbreak's epicenter, is the base of Dongfeng Motor Corp., one of the three main shareholders in French carmaker PSA Group, the maker of Peugeot, Citroen and Opel models. In addition to that partnership, Dongfeng is also working on electric vehicles with PSA's main domestic rival, Renault SA.
- Parts producers with multiple sites in China include German tire and powering-systems manufacturer Continental AG and French peers Valeo SA and Faurecia SE.
- Tech stocks, which touched their highest levels since May 2001 on Friday, also pulled back, weighed by losses for almost every member of the Stoxx Tech Index apart from Ericsson. Prosus NV, Micro Focus International Plc, Dialog Semiconductor Plc and AMS AG were among the biggest decliners.
- Trade-war concerns for the tech sector have dissipated, Fahad Hassan, a fund manager at Atlantic House Fund Management, said by phone, still "this is just a different sort of macro concern that obviously affects all stocks, but given tech has been the strongest group so far this year, I think it was going to get hit on any pull-back," Fahad added, referring to the coronavirus.
Mining and Steel
- Mining shares slid as much as 4.6%, their biggest drop on since August. Large diversified miners such as Anglo American Plc, BHP Group Plc, Glencore Plc and Rio Tinto Plc paced the retreat, alongside steelmakers ArcelorMittal SA and Evraz Plc, as base metals tumbled on concerns that the spread of the coronavirus will weigh on demand, with China being the world's largest consumer of commodities.
- "The sharp fall of virtually anything related to industrial metals this morning is more than a knee-jerk reaction to the latest coronavirus developments. It more reflects in our view the rise in the global level of uncertainty, which will remain high in the next three weeks; at the very least. Keep your distances," said Stephane Barbier de la Serre of Makor Capital.