European shares hit 1-month high on stimulus speculation
LONDON, June 20 — European equities hit a one-month closing high on Tuesday after disappointing German economic data rekindled expectations of more monetary stimulus, which could send equities on a short-term rally.
German economic sentiment posted its biggest drop since 1998 this month, data showed, spurring talk that the US Federal Reserve, which starts a two-day meeting on Tuesday, and the European Central Bank may pump out more cheap cash.
That prospect triggered a broad-based rally in stocks, which are regarded as risky assets because their returns depend on corporate profits, while investors switched out of German government bonds.
"The Fed will probably act this week," Claudia Panseri, a strategist at Societe Generale, said. "Risk assets will probably be higher for a few days on the announcement."
The pan-European FTSEurofirst 300 added 1.6 per cent to 1009.55 points, while the euro zone Euro STOXX 50 index rose 2 per cent to 2,198.01.
Italy's FTSE Mib and Spain's Ibex 35 rose 3.4 per cent and 2.7 per cent, outpacing their northern peers on speculation a cash injection by the ECB would help bring down the two countries' borrowing costs.
Investors hoping for action from the ECB are likely to have to wait at least until its July 5 Governing Council meeting. European central bankers also meet on Wednesday, but no interest rate announcement is scheduled that day.
Soc Gen's Panseri said the ECB seemed reluctant to act in the immediate future, leaving the euro zone exposed to deflationary risks, which would hit nominal corporate profits, and therefore equities.
In view of the low growth and lingering sovereign debt risk in the euro zone, Panseri expected the Euro STOXX 50 to fall about another 15 per cent to 1,850 points by the end of September.
The technical picture on the Euro STOXX 50 also pointed to a long-term bearish market, although Tuesday's gains may herald a brief pause in the declines.
"Resistance in the hourly chart shows 2,200," said Roelof-Jan den Akker, a senior technical analyst at ING, pointing to a hurdle corresponding to the index's 50-day moving average.
"As long as this resistance is not broken, a consolidation seems likely to me."
Risk on/risk off
The Euro STOXX 50 has dropped about 15 per cent since its March top, but risen 7 per cent from a six-month low hit in early June, when worse-than-expected US jobs data was followed by speculation about new action from central banks.
William De Vijlder, a chief investment officer at BNP-Paribas Investment Partners, said he expected the market would remain stuck in a 'risk on/risk off' mode, where selloffs are followed by sharp rallies, as long as euro zone authorities fail to reach an agreement on how to share the region's debt burden.
"The cyclical environment has been worsening and we need something more profound to happen to get a feeling that the crisis is fully under control," said De Vijlder, who is the CIO of the firm's of Strategy and Partners division, said.
"Eventually, there will be something in terms of pooling of debt and that's what the market is pushing for."
He remained "underweight" equities and was using only a portion of his 'risk budget' until "significant progress" was made by European leaders and there was greater confidence about economic growth in the United States and China.
He partly offset that position with an "overweight" on emerging market assets, including equities, which he believes overly discount the impact of Europe's crisis and fail to capture these markets' growth potential in full.
The impact of the euro zone crisis rippled through corporate performance, with shares in Danone dropping 7.1 per cent to the bottom of the FTSEurofirst 300 after the French food group warned of a fall in profit margins due to rising materials costs and the deepening debt crisis in southern Europe. — Reuters