In Europe: European shares retreat ahead of EU policymakers’ meet

23 May 2012


“Investors fret about the stability of the euro zone.” No doubt they should!

Banks and basic resource stocks led European shares sharply lower around midday on Wednesday, correcting a two-session rally in volatile trade, as investors turned cautious ahead of a meeting of European Union policy makers.

At 1035 GMT, The FTSEurofirst 300 index of top European shares was down 16.18 points, or 1.6 percent at 977.49, having gained 2.5 percent in the last two trading days, while the euro zone’s blue chip Euro STOXX 50 index shed 46.52 points, or 2.1 percent, to 2,146.33.

The bounce over the previous two-sessions coincided with the FTSEurofirst 300 entering “oversold” territory for the first time since August, according to its relative strength index.

“The rally over the last two-days was simply a bounce from oversold territory, purely technical driven rather than anything fundamental, and I’m not surprised it has fizzled out again, because the things we have been worrying about for the last six weeks are still big concerns,” Ian Williams, equity strategist at Peel Hunt, said.

The trend for Europe’s top shares remains on a downward trajectory as investors fret about the stability of the euro zone and the outlook for global growth.

Losses in Europe echoed a late reverse on Wall Street, which came after Dow Jones quoted former Prime Minister Lucas Papademos as sayingGreece had no choice but to stick with a painful austerity programme or face a damaging exit from the euro zone.

That soured sentiment ahead of a meeting of European leaders where amongst other things it is expected the idea of regional bonds jointly underwritten by all euro zone member states will be discussed.

Anxiety among investors was reflected in declines in basic resource stocks, the previous session’s top gainers, and banks, heavily exposed to the fortunes of the euro zone.

Yields in troubled periphery government bonds such as Spain, Italy and Portugal rose.

EARNINGS CONCERNS

Lower analyst estimates have so far helped European companies outperform in expectations in the most recent quarterly earnings season with 58 percent of corporations meeting or beating forecasts according to Starmine data, but worries persist over the earnings outlook as the European debt crisis rumbles on.

The recent resurfacing of the euro zone crisis is already taking its toll on earnings momentum, with companies in the European periphery suffering steeper cuts to consensus expectations than their peers in the region’s core, Deutsche Bank data showed.

Wall Street Computer major Dell Inc forecast disappointing second-quarter revenue as U.S. and European corporate tech spending weakens.

British luxury brand Burberry shed 2.4 percent, the top European blue chip faller, after the firm posted an underlying pretax profit of 376 million pounds, narrowly missing analysts’ average forecast. (nL5E8GN1RD)

Luxury goods shares have wobbled in recent months over worries that Europe’s long-running debt crisis could help trigger an economic slowdown in emerging markets such as China.

On the upside, Carrefour bounced 3.3 percent as Credit Suisse double-upgraded Europe’s largest retailer to “outperform” from “underperform” and lifted its target price by 25 percent to 17.50 euros, citing the arrival of new chief executive Georges Plassat as the catalyst.

Defensive shares such as German drugmaker Merck KGaA and British utility National Grid were among the few gainers as investors’ risk appetite faded.

“I suspect that investors will continue to hide in German bonds, the dollar and the Yen and defensive sectors and I suspect that will be the case throughout the summer,” said Peel Hunt’s Williams.

UBS said in an equity strategy note that investors have been net buyers of defensives over the last nine weeks, and last week saw the second-biggest net buying of defensives in nine months, showing just how cautious market sentiment is in the light of the gloomy macro economic environment.

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