Stocks drop as US states roll back economic reopening plans

Global stocks fell following a sharp reversal on Wall Street, as concerns mounted over the rollback of reopening measures in the US and investors braced themselves for a brutal quarterly results season.

European shares continued their volatile trading pattern on Tuesday, as the continent-wide Stoxx 600 fell 1.2 per cent. London’s FTSE 100 dropped 0.8 per cent, while Frankfurt’s Xetra Dax shed 1.3 per cent.

“Equities are navigating through a ‘zone of uncertainty,’ because earnings visibility remains elusive and fresh spikes of Covid-19 are occurring in the majority of US states, delaying and even rolling back economic reopening,” said Terry Sandven, chief equity strategist at US Bank Wealth Management.

The declines came after a turbulent session in New York, where the S&P 500 gave up initial gains to end almost 1 per cent lower after briefly crossing into positive territory for the year. The Nasdaq fell 2.1 per cent.

The reversal was spurred in part by California’s decision to join Texas and Arizona in rolling back its economic reopening. Gavin Newsom, governor of the most populous US state, ordered the shutdown of bars, cinemas and dine-in restaurants in an effort to contain a sharp rise in Covid-19 cases and hospitalisations.

Futures tipped US stocks to open slightly higher when trading begins on Wall Street, with the S&P 500 expected to rise 0.5 per cent.

Investors were also bracing for a grim US earnings season, with S&P 500 companies expected to report a 45 per cent plunge in quarterly profits. That would be the biggest drop since the depths of the 2008-09 financial crisis.

However, the economic fallout from the pandemic remains the focus, with new outbreaks in the southern and western parts of the US threatening a recovery in some of the country’s most important economic hubs.

“Investors have been looking beyond the prospect of a temporary period of poor earnings in general,” said John Higgins, chief markets economist at Capital Economics. “The biggest threat to the overall stock market now is probably a renewed hit to economic activity from the recent resurgence of coronavirus cases.”

The Cboe’s Vix index of equity market volatility, often referred to as Wall Street’s fear gauge, rose sharply on Monday to 32.19, reflecting unease among traders ahead of earnings season on the pace of economic recovery.

The IMF and OECD have downgraded their economic forecasts for 2020 in recent weeks. Data released on Tuesday showed the UK’s economy rebounded only 1.8 per cent in May after a historic plunge the previous month, widely missing forecasts for a 5.5 per cent rebound.

Ben May, director of global macro research at Oxford Economics, was cautious about the economic recovery in the second half of the year, warning the latest data suggested “the easy activity gains may have already been exhausted”.

Equities in the Asia-Pacific region recorded broad losses. Japan’s Topix index fell 0.5 per cent and Australia’s S&P/ASX 200 shed 0.6 per cent on Tuesday afternoon. China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks shed 1 per cent.

The fall for Chinese stocks — after they notched their best week in five years — followed the latest escalation of US-China tensions. The US vowed on Monday to adopt a tougher stance against China’s territorial claims in the South China Sea and vowed to maintain pressure over alleged human rights abuses in Xinjiang.

Offshore investors shifted out of Chinese stocks with net sales of Rmb17.4bn ($2.5bn) via stock connect programmes between Hong Kong and mainland bourses on Tuesday, according to FT calculations based on Bloomberg data.

Better than expected China trade data failed to bolster sentiment. Analysts at Nomura warned that Chinese exports, which were boosted last month because of shipments of personal protective equipment, could be hit by falling demand “as some countries gradually reopen their economies and start producing PPE domestically for security reasons”.

Crude prices dropped, hit by the prospect that renewed restrictions on US states could undermine oil demand. Brent crude, the international benchmark, was down 1 per cent at $42.27 a barrel while US marker West Texas Intermediate fell 1.3 per cent to $39.59.

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