Having remained sanguine over recent weeks as coronavirus infection rates in Europe mounted, on Thursday investors sat up and paid attention. After the French government imposed a 9:00pm curfew on Paris and eight other cities, and after the German government tightened restrictions on Covid hotspots including Berlin and Frankfurt, the euro Stoxx index fell -2.2% during Thursday’s session.
Clearly as infection rates have risen, and governments have reacted, investor sentiment has deteriorated. This is reasonable enough; the new round of restrictions will weigh on economic activity, and may well see a small quarter-on-quarter contraction in eurozone GDP in the fourth quarter.
But it is important to keep the sell-off in perspective. The euro Stoxx remains within the narrow 347-371 range that has prevailed since coronavirus infection rates began to pick up again in July (see the chart below). The market could well test the lower bound of this range in the coming days.
But Europe’s new restrictions are a long way from the blanket shutdowns imposed six months ago, and their economic impact will be much smaller. As a result there is little reason to believe that the new measures have tilted the balance of probability in favor of a decisive breakout downward through the bottom of this range.
