By Will Horner
U.S. stock futures dropped Thursday, with dimming stimulus hopes and the prospect of fresh restrictions across Europe casting a shadow over the global economic outlook.
Futures tied to the S&P 500 slid 1.2%, suggesting the benchmark index could retreat for a third consecutive day. Overseas, the pan-continental Stoxx Europe 600 fell 2.4% as governments hurried to impose lockdown measures to halt the spread of Covid-19 cases
The U.S. stock market has largely plateaued this week as investors assess a swath of risk factors. Uncertainty surrounding the coming elections and the on-again off-again stimulus talks, as well as risks of a second wave of coronavirus infections, the timeline for Covid-19 vaccines and treatments, and questions about how companies are weathering the recession have left many investors sitting on the sidelines.
"The back and forth on the pre-election stimulus program has gone from a lot of optimism to a lot of pessimism," said Jim McCormick, global head of desk strategy at Natwest Markets. "And we are seeing setbacks on the vaccine and a general pessimism about the worsening Covid situation in Europe."
Markets are also reflecting investors' reluctance to make any large bets until after the election, when the risk of contested results has been eliminated, said Mr. McCormick.
Former Vice President Joe Biden holds an 11-point lead over President Trump with less than three weeks to go before Election Day, according to the latest Wall Street Journal/NBC News poll. Despite Mr. Biden's lead, uncertainty about a surprise on election night is keeping investors cautious.
"We are in this holding pattern where I think the market is realizing the Democratic sweep is becoming more likely," Mr. McCormick said. "But because of the experiences of 2016, there is a lot of hesitation to price things in."
London became the latest European capital to tighten lockdown measures, with restrictions set to come into force this weekend. On Wednesday, France declared a state of emergency and imposed a nightly curfew for the Paris region and eight other metropolitan areas across the country.
The new measures threatened to imperil Europe's fragile recovery, said Altaf Kassam, EMEA head of investment strategy and research at State Street Global Advisors.
"We have done the easy bit of the economic recovery, the initial rebound. Now we have got to do the hard yards of getting economies back to where they were before lockdown, before Covid," said Mr. Kassam. "These rolling lockdowns are going to crimp that recovery and make it so much harder," he said.
Concerns over Europe's battle with the coronavirus were on display in bond markets. Germany's 10-year bond yield fell to minus 0.625%, its lowest level since March. Italy and Greece's 10-year bonds rose, suggesting investors were exiting government debt seen as a riskier bet. The euro was down 0.2% against the dollar.
The news of the new restrictions in the U.K. also hit local assets, with U.K. government 10-year bonds registering their biggest daily fall in over a month and the British pound falling 0.8% against the dollar.
Jobless claims data Thursday showed a further 898,000 applications for unemployment benefits were filed last week. That was more than the 830,000 claims economists had been expecting.
Recent jobs data "has indicated that the recovery is losing steam," said Hugh Gimber, global market strategist at J.P. Morgan Asset Management. "The market is recovering but at a much slower rate than earlier in the year. There's still a very long way to go," he said.
The deadlock between the White House and Congress over any additional government spending appeared to become more entrenched Wednesday. Treasury Secretary Steven Mnuchin played down the chances of a pre-election breakthrough and House Speaker Nancy Pelosi said major disagreements had yet to be resolved.
Those comments dimmed investors' hopes and caused the S&P 500 to end Thursday down 0.7%. Talks are set to continue Thursday.
"Investors have to view any stimulus ahead of the election as a bonus," Mr. Gimber said. The most pressing question, he added, is, "if there is a Democrat clean sweep, could they get the stimulus package passed during a lame-duck session at the end of the year, or will it wait until next year to get it through?"
In premarket trading, shares of Walgreens Boots Alliance were up 2.6% after the retailer reported a drop in profit that was less than expected. Shares of Vertex Pharmaceuticals were down 10% after it halted clinical trials for a protein-deficiency drug because of safety concerns.
Brent crude, the international oil benchmark, dropped 2.6% to $42.17 a barrel amid rising concerns about the global economic outlook. Gold fell 0.4%.
The yield on the 10-year Treasury note ticked down to 0.697%, from 0.721% Wednesday.
In Asia, Hong Kong's Hang Seng retreated 2.1% by the close of trading, while Japan's Nikkei 225 fell 0.5%.
Write to Will Horner at William.Horner@wsj.com
(END) Dow Jones Newswires
10-15-20 0855ET
