Covid-19 Resurgence, Lockdowns Threaten Europe ETF Rebound

Europe region-related exchange traded funds slipped Monday, testing their short-term trend lines, as the resurgence in Covid-19 cases triggered new lockdowns and weighed on the Eurozone’s economic outlook.

On Monday, the Vanguard FTSE Europe Index Fund ETF Shares (NYSEArca: VGK) dropped 0.5%, and iShares MSCI Eurozone ETF (BATS: EZU) fell 0.6%, with both ETFs testing their short-term support at the 59-day simple moving average.

Austria put itself back under a lockdown after Netherlands, Hungary, Slovakia, and the Czech Republic reimposed lockdown measures to help contain the spread of new coronavirus infections. Germany’s health minister refused to rule out one as well, Reuters reports.

“It’s just building, that story of the pandemic not being quite over in Europe, and that’s a knee-jerk flight to quality,” Peter McCallum, rates strategist at Mizuho, told Reuters.

The threat of another economic slowdown due to imposed curbs weighed on the rebound in European equity markets. French and German stocks recently hit a string of record highs on recovery hopes.

“One thing is certain if the whole of Europe had to go under lockdown once more, and depending on how long that would last, we would need to rethink our growth scenarios,” Stephane Ekolo, a global equity strategist at the brokerage Tradition, told Reuters.

Market observers are downwardly revising fourth-quarter prospects as a result of the fresh lockdowns. Refinitiv I/B/E/S currently projects a 51% rise for the STOXX 600 benchmark for the fourth-quarter earnings season, or only marginally below the 60% in Q3. While the outlook has been downgraded, it is still upbeat relative to predictions of a 21% earnings growth for S&P 500 companies over the fourth quarter.

“Markets have been aware for a few weeks now that this winter will be difficult and that the vaccination rollout doesn’t reduce lockdown risk by 100%,” Emmanuel Cau, head of European equity strategy at Barclays, told Reuters.

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