(Reuters) – European shares fell on Monday as signs of a resurgence in coronavirus cases in Germany and elsewhere unnerved investors who were hoping for a swift economic recovery from the crisis.

The pan-European STOXX 600 index (STOXX) slid 1% by 0710 GMT, with travel and leisure (SXTP), oil and gas (SXEP), and bank stocks (SX7P) leading losses.

The World Health Organization reported a record increase in global coronavirus cases on Sunday, while Germany’s COVID-19 reproduction rate jumped to 2.88, a rate showing infections are rising above the level needed to contain the disease over the longer term.

Scandal-hit Wirecard (DE:WDIG), which lost 72% in market valuate over the past week, fell another 43.9% as it said a quarter of its assets totalling 1.9 billion euros ($2.13 billion) that auditor EY had been unable to account for likely did not exist and withdrew its earnings forecast.

Lufthansa (DE:LHAG) dropped 6.7% amid a showdown between the airline’s biggest shareholder and the German government over the terms of a 9-billion-euro bailout.

Investing.com – The dollar has drifted lower in early European trade Monday, but that’s off three-week highs as investors looked for safety amid renewed worries about a second wave of coronavirus infections.

At 3 AM ET (0700 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 97.493. The index had earlier climbed to a daily high of 97.677, a level not seen since the start of this month, while USD/JPY was up 0.1% at 106.94.

“The main driver has been concerns about the spread of the coronavirus and arguably the speed of the global recovery, emphasizing the still strong FX versus risk correlation,” said analysts at Danske Bank, in a research note.

Sunday saw a record 183,020 cases globally, according to the World Health Organization, with the bulk in North and South America. The number of global cases is now almost 9 million, according to Johns Hopkins University data.

EUR/USD last traded up 0.1% at 1.1191 after dipping to a three-week low of 1.1168 in early trade. This followed the failure of the European Union leaders to agree on a structure for the planned 750 billion euros Covid-19 recovery fund.

“From the comments from the leaders, the disagreement does not seem to be about the size of the package, but rather about grants versus loans distribution,” said Danske Bank.

This is proving a tricky obstacle, with four members [Sweden, Denmark, Austria and the Netherlands] being particularly vocal in their opposition to the plan to pay out the majority of this stimulus in grants instead of loans.

The EU leaders are aiming to reach an agreement before the summer break, which may mean late July/early August, potentially at a physical meeting.

GBP/USD gained 0.2% to 1.2379, holding just above a three-week low, weighted as well by Brexit worries since there has been little progress in trade discussions with Europe.

MANILA/BEIJING (Reuters) – Behind the boom in China’s steel production since March – and hopes for a quick economic recovery – is a tale of two diverging sectors: construction demand for infrastructure projects has been strong, while manufacturing has been slower to bounce back.

That highlights the challenge facing policymakers as Beijing and local governments can control the pace of spending on projects like roads, rails and reservoirs, but have very limited options to support exports or domestic demand for machinery and appliances.

The soft underbelly in China’s steel revival following the coronavirus outbreak is about to be thrown into stark relief by a seasonal downturn at building sites, analysts say, and points to a more protracted recovery for the world’s second-largest economy from a once-in-a-century pandemic.

“There is only so much China’s steel industry can do while the rest of the world struggles,” said Daniel Hynes, senior commodity strategist at ANZ.

CRITICAL COG

China’s mammoth steel sector has long been a central pillar of its industrial powerhouse, employing hundreds of thousands of workers who churn out vital raw materials for industry and support scores of ancillary logistics and processing businesses.

The economy shrank 6.8% in the first quarter, the first contraction in decades, hit by the new coronavirus which emerged in China late last year.

The surge in steel output to all-time highs in May raised hopes that the heart of the economic engine is recovering well, and may help resuscitate growth at home and globally.

Yet amid the recent sector-wide bustle has been a lopsided reliance on metal demand from construction sites that has partially masked weakness from manufacturers and calls into question the robustness of the steel boom as well as how quickly China can restore growth.

(GRAPHIC: China’s GDP vs crude steel output – https://fingfx.thomsonreuters.com/gfx/ce/yzdvxdlmzvx/Annotation%202020-06-19%20115357.jpg)

“The market appears to be relying too heavily on expected infrastructure stimulus in China to boost demand,” ANZ’s Hynes said.

REBAR RELIANCE

Demand for the main steel products used in construction – rebar and wire rod – has accounted for an average over 53% of total steel demand since late March, according to calculations based on figures from data-tracking firm Mysteel.

That compares to an average of 47.5% for all of 2019, and 51% for the same period in 2019.

(GRAPHIC: Seasonal steel demand by product in China – https://fingfx.thomsonreuters.com/gfx/ce/nmovakealva/SeasonalSteelDemand2020.png)

At the same time, demand for the main steel products used by manufacturers – hot-rolled coil (HRC) and cold-rolled coil (CRC) – has been well below normal, averaging 35% of total demand since late March compared to 40.4% on average in 2019.

Stocks of rebar have also fallen faster than other steel products, dropping by 51% since peaking in mid-March.

(GRAPHIC: Seasonal steel stocks by type in China – https://fingfx.thomsonreuters.com/gfx/ce/gjnvwymdbvw/SeasonalSteelStocks2020.png)

Given the extent of lockdowns in many of China’s trading partners, sluggish factory demand is not too surprising and could persist for many more months.

Yet the surge in overall steel production – driven by a 59% jump in rebar and 40% rise in wire rod output since mid-March – suggests the sector is at risk of over-supplying the market just as demand is expected to take a hit from rained-out work sites, especially across the South.

(GRAPHIC: Seasonal steel production by type – https://fingfx.thomsonreuters.com/gfx/ce/dgkvlwnyxpb/SeasonalSteelOutput2020.png)

The monsoon season, which runs through August, arrived 10 days earlier than normal in southern China this year, causing widespread floods that have already stopped work at some sites.

“We are now about to enter the traditional slack season for steel consumption,” said Richard Lu, senior analyst at consultancy CRU in Beijing. “It will largely depend on the weather, and we should see some decline at least starting from July, if not late June.”

The most-active rebar contract has rallied 14% from April 1.

DEMAND DEPRESSION

While construction materials are losing demand momentum, flat steel use has been plagued by the global economic contraction and that has kept China’s factories underpowered.

(GRAPHIC: Exports of home appliances from China – https://fingfx.thomsonreuters.com/gfx/ce/oakpeqwznpr/612e.jpg)

Sales of steel-heavy items like autos and machines have fallen this year, with China’s auto exports dropping 16.9% in the first five months, and home appliance exports – worth $77.8 billion in 2019 – down 9.1%.

Direct metal exports have also dropped.

STIMULUS TEST

To offset lower global demand China’s policymakers have unveiled stimulus measures aimed at reviving consumption and supporting large infrastructure projects including key industries.

(GRAPHIC: Monthly output for main home appliances in China – https://fingfx.thomsonreuters.com/gfx/ce/xlbvggerdvq/612d.jpg)

However, the uneven steel demand shows the limits of Beijing’s stimulus, which comes with its own risks, and points to a bumpy economic recovery.

“The Chinese government does not want to spend a lot on stimulating the economy because that also means having to pile up debts,” said Iris Pang, ING chief economist for Greater China.

TOKYO (Reuters) – U.S. stock futures erased losses and Asian stocks held flat on Monday, trying to shake off worries that rising coronavirus cases in the United States could scupper a quick economic rebound from the massive downturn triggered by the pandemic.

U.S. S&P 500 futures (ESc1) rose 0.4%, having erased early losses of 1.05% while Japan’s Nikkei (N225) also eked out gains of 0.1%, similarly recovering from early losses.

MSCI’s broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) was almost flat while mainland Chinese stocks (CSI300) ticked up 0.3% to 3-1/2-month highs.

After a brutal sell-off earlier this year, share prices had risen globally over the past three months, helped by massive stimulus around the world and hopes the worst of the pandemic was over.

“The market is surprisingly resilient. Perhaps many investors think the uptrend is in place. But we need to keep an eye on rising coronavirus infections in some countries,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities.

Highlighting economic challenges from the impact of social restrictions to contain the pandemic, Apple Inc (O:AAPL) said on Friday it would temporarily shut 11 U.S. stores as coronavirus cases rise in some states, triggering selling in stocks.

Data from Johns Hopkins University shows new U.S. cases on Saturday hit the highest since early May.

Graphic: COVID-19 in the United States, https://fingfx.thomsonreuters.com/gfx/mkt/nmovajmrbpa/20622D.png

“The second wave is becoming a theme for markets. The increase in states such as Florida and South Carolina is big enough to be labelled as second wave,” said Yoshinori Shigemi, global strategist at JPMorgan (NYSE:JPM) Asset Management.

“Whether there will be a lockdown may vary depending on region. It will be a tough decision for politicians. But they probably have no other choice if they are running out of hospital beds,” he said.

The pandemic is accelerating globally with the World Health Organization (WHO) reporting a record increase in global coronavirus cases on Sunday.

“The market has been pricing in a rapid recovery so I doubt there are much upside gains to be made. We now need to see whether the earnings outlook will meet up with expectations,” said Takuya Hozumi, investment strategist at Mitsubishi UFJ (NYSE:MUFG) Morgan Stanley (NYSE:MS) Securities.

The world’s shares are now traded at the most expensive levels since 2002 compared with projected earnings in the coming 12 months.

Graphic: World stock market valuations, https://fingfx.thomsonreuters.com/gfx/mkt/jznpnzdgopl/20622E.png

Investors are also wary of developments in Hong Kong after details of a new security law for the territory showed Beijing will have overarching powers on its enforcement.

China’s top legislative body, the National People’s Congress Standing Committee, will meet on June 28, and the Global Times reported it would likely enact the Hong Kong security law by July 1.

Hong Kong’s Hang Seng (HSI) fell 0.3% in early trade, underperforming regional markets.

In currencies, major currencies were mostly steady.

The euro traded at $1.1187 (EUR=), near its lowest in nearly three weeks.

The yen changed hands at 106.88 per dollar , not far from a one-month high of 106.58 to the dollar hit earlier this month.

Concerns about the pandemic sent gold 0.8% higher to $1,757.2 per ounce, near its May peak of $1,764.8, which was its strongest since October 2012.

Oil prices firmed slightly on tighter supplies from major producers, but concerns that a record rise in global coronavirus cases could curb a recovery in fuel demand checked gains.

Brent crude (LCOc1) rose 0.6% to $42.44 a barrel while U.S. crude (CLc1) was at $40.05 a barrel, up 0.6%.