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Business activity in Europe is declining again

The second wave of the pandemic is now plaguing Europe and it doesn’t seem to be showing any signs of a slowdown. Apart from the Czech Republic, record increases were also recorded yesterday in Germany, Poland, and the Netherlands. This is beginning to affect the business activity and expectations of managers as their business will develop in the coming weeks. Preliminary PMI indicators for a key services sector are falling again, and further restrictions could significantly affect economic activity in Europe.

 

The services sector is back in contraction

Economic activity fell again in October due to the second wave of the pandemic, and the region is once again on the brink of a contraction in the fourth quarter. The preliminary compound PMI, which monitors both activity in the services sector and in the outflow of the sector, fell to four-month lows. Specifically to 49.4 points, which indicates a contraction. However, the manufacturing sector remains relatively resilient to the recent rise in new cases of Covid-19. The PMI for the manufacturing sector rose to 54.5 points. However, the services sector, which is key to Western economies, has fallen to a five-month low.

 

Chart: PMI for the euro area services sector (Source: tradingeconomics.com)

 

New restrictions across Europe

The results of the preliminary indicators are relatively worrying, as the eurozone may end up again in a contraction caused by the covid and subsequent government restrictions during the fourth quarter. France introduced new curfews last week, further extending it to other regions yesterday. However, the restaurants and bars remain open until 21:00. The Czech Republic and the Netherlands have returned to a partial lockdown. New restrictions in the Netherlands include restrictions on crowding, or closed bars and restaurants. New restrictions are also being introduced by Germany or Ireland, and other countries will continue to join in the event of a deteriorating situation. The pandemic has not yet shown signs of slowing down, and several countries registered a record increase in new infections yesterday.

 

Despite the fundamentals, the markets are positive

However, markets in Europe are still relatively positive today, and all indications are that the week will end on a positive wave. The euro has completely wiped out yesterday's losses and is back above 1.18 on the EURUSD pair. The British pound is also doing well, counting the latest news from the Brexit negotiation camps, where it has been said that both sides have made some concessions and the talks are still constructive. The German DAX index also followed yesterday's session and continues to grow today.

 

The report on a possible contraction in the region is not yet too great a danger for the financial markets. Many investors expect a larger economic downturn to put further pressure on the ECB, which would have to add another monetary stimulus, and a further wave of fiscal aid from governments is generally expected. Therefore, for the time being, the development of the markets is accompanied by a relatively positive mood. This was also supported by the belief that the new president will be a positive stimulus for the markets, which will deliver the long-awaited fiscal stimulus in the US.

 

Chart: 15M DAX index chart (Source: PurpleTrading cTrader)

 

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