In Europe: Cyclicals push European shares to 13-month highs

17 August 2012


“Many indexes faced resistance on charts.” The calm before the storm?

Europe’s top share index hit a 13-month high on Friday and was on track to record its best weekly winning streak in seven years on expectations that¬†euro zone policymakers might resolve their differences and work closely to tackle the debt crisis.

However, near-term gains were seen limited as many indexes faced resistance on charts and investors awaited the outcome of a series of policymaker meetings in the coming weeks before forming a view about the market’s direction, analysts said.

Sectors linked to economic growth were the best performers, with autos, technology and banks rising 0.9 to 1.4 percent. The Euro STOXX 50 volatility index fell more than 5 percent to a one-month low, indicating a rise in investors’ appetite for riskier assets such as equities.

Sentiment further improved after German Chancellor Angela Merkel late on Thursday voiced support for European Central Bank President Mario Draghi’s crisis-fighting strategy, pressing her European partners to move swiftly towards a closer integration of fiscal policies.

“Policymakers seem to be doing just enough to keep investors on the hook with their comments that all is in hand and they are ready to act as and when required,” said Oliver Wallin, investment director at Octopus Investments, which manages nearly $4 billion.

“Jackson Hole at the end of this month and September’s round of central bank announcements remain the focus. We remain cautious and have taken off some of our short exposure for the time being, but are ready to redeploy this insurance policy quickly, if required.”

U.S. Federal Reserve Chairman Ben Bernanke used his speech at the central bank’s annual conference in Jackson Hole in 2010 to hint at the Fed’s second round of quantitative easing.

On Sept. 6, the ECB may spell out at its monthly policy meeting exactly how it could intervene in the bond market if asked. Six days later, Germany’s constitutional court will deliver a ruling on the euro zone’s permanent ESM rescue fund before which Berlin cannot ratify it.

At 1110 GMT, the FTSEurofirst 300 index was up 0.3 percent at 1,107.24 points after rising to 1,109.69, the highest since July 2011. The index is set to gain for an eleventh week in a row, matching the longest weekly winning run in 2005.

The index has gained about 9 percent since late July when Draghi said the ECB was “ready to do whatever it takes to preserve the euro”, sparking expectations of bold measures to help lower the borrowing costs of debt-stricken Spain and¬†Italy.

The euro zone’s blue chip Euro STOXX 50 index, up 0.4 percent at 2,466.93 points, has gained about 14 percent since then, while the region’s banking index has gained around 30 percent. Both Spain’s IBEX and Italy’s¬†FTSE MIB were up 1.7 percent.

“I see this upward move as a relief rally, driven by an anticipated policy response and a prevailing corporate climate that is not as bad as current valuations suggest,” Robert Parkes, equity strategist at HSBC Securities, said.

TECHNICAL PICTURE

The technical outlook improved, with the UK’s FTSE 100 index recording a bullish signal called a ‘golden cross’. Its 50-day moving average crossed above the 200-day moving average. France’s CAC 40 was close to witnessing the same pattern, with its 50-day moving average about to cross the 200-day average.

“There has been momentum going on and the technical outlook has turned quite positive,” said Jose Antonio Gonzalez Ibanez, technical analyst at EuroStockScreener, in¬†Spain.

“Chances are we get a pull-back in the next few weeks because of the strong resistance levels indexes are hitting now, but a pull-back won’t change the fact that the overall trend has turned positive.”

Analysts said investors should gradually add cyclical shares into their portfolios to maximise returns.

“The quality defensives have been very well bid through this cycle and valuations are, at least on a relative basis, very toppy. From our perspective, the risk-return in cyclicals is still stronger,” Ian Richards, head of equity strategy at Exane BNP Paribas, said.

“We have been pushing the banks for the last 5-6 weeks now.”

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