In Europe: Shares pause for breath near 8-month high

15 March 2012


Thursday hangover in Europe…overall sentiment still positive as “upgrades are finally starting to outnumber the downgrades.”

European shares paused near eight-month highs on Thursday, lacking the momentum to push higher without more reassurance from economic data and corporate earnings.

The pan-European FTSE Eurofirst 300 was down 0.08 percent at 1,097.37 points at 1123 GMT, in a volatile session which has seen the index yo-yo either side of unchanged after reaching 1,105.09 on Wednesday – its strongest performance since July 2011.

“We are in a consolidation phase and I see slightly more downside risk than upside risk at this point,” said Peter Garnry, equity strategist at Saxo Bank.

The narrower Euro STOXX 50 index of euro zone bluechips added 0.1 percent to 2,576.93 points, stopping short of the intra-day high of 2,593.89 set on Wednesday.

Activity was skewed by investors covering their positions ahead of an options expiry deadline on Friday, which could see those who had bet on equity market weakness having to pay out after the market rallied around 6-7 percent in the past month.

“There is still a bit of institutional buying into any weakness, we think that’s driven by the expiries on Friday as people who are short call options are looking to buy them back,” said Andy Ash, head of sales at Monument Securities.

By being short call options, investors risk having to hand over the underlying security if its price is above a certain level at options expiry – a potentially expensive undertaking if they don’t already hold the stock.

“Most of the open interest on the Euro STOXX is in the 2,600 calls, probably nearly three times as much open interest as in any other contract,” Ash said. “As you get closer to that people have to buy¬†futures to cover their exposure.”

For the rally to continue in a sustainable fashion, though, the market will likely need more good news on global economic growth – such as from the weekly U.S. jobs data at 1230 GMT – and from signs of that filtering through into corporate profits.

U.S. data is all the more important given that an expected recession in the euro zone means companies have to look elsewhere for profit growth.

Some 55 percent of euro zone bluechips have missed forecasts with their 2011 earnings so far, prompting analysts to cut their estimates on future results by 0.8 percent, according to Thomson Reuters StarMine data.

On a week-by-week basis, though, upgrades are finally starting to outnumber the downgrades, which bodes well for the chances of fresh gains in the future, according to Patrick Moonen, senior equity strategist at ING Investment Management.

“That is a very important driver for the equity market. From a market that has been driven by liquidity, we will come into a phase when the market is more and more driven by economics and earnings data,” he said, forecasting that European shares could gain a further 7 to 9 percent by year-end.

Moonen recommends playing the rally through cyclical sectors such as industrials “which clearly benefit from strong dollar and strong growth in emerging markets”.

The STOXX 600 index of industrial goods and services was one of the best performers on Thursday, up 0.6 percent.

Underscoring the scope for positive earnings surprises, German potash and salt miner K+S was the top gainer in the FTSE Eurofirst, up 5.9 percent after forecasting strong demand for fertiliser that contrasted with the gloomier outlook of larger rivals.

On the downside, autos dropped 0.5 percent after data showed the euro zone car market shrank 11.8 percent year-on-year in February.

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