In Europe: Strong ZEW boosts European stocks towards peaks

13 March 2012

As the paymaster succeeds, so does the region? Uptick described as a “halo effect comng from Greece.”

European shares rose on Tuesday, closing in on multi-month peaks, as strong German sentiment data boosted confidence in the health of the global economy and with further impetus expected from U.S. retail sales numbers later in the session.

German analyst and investor sentiment rebounded to its highest level since June 2010, far outstripping already upbeat analyst expectations, according to ZEW data.

With Germany seen as the engine of European growth and a favourite exposure for equity investors uncertain about the debt and budget positions of countries like Greece or Spain, the release bolstered market confidence.

Investors also bet on a strong reading from U.S. retail sales at 1230 GMT, where the monthly pace of growth is forecast to more than double in February.

“Broadly the news has been very supportive. The U.S. economy has probably got more momentum than had been assumed and that’s true of the UK and also true of northern Europe,” said Richard Jeffrey, chief investment officer at Cazenove Capital, which has some 15 billion pounds ($23 billion) under management.

“Valuations are relatively modest at the present time, so I think there is still room for equities to perform quite well, as expectations catch up with macroeconomic news.”

The Euro STOXX 50 was up 1.1 percent at 2,541.61 points by 1131 GMT, hitting session highs after the ZEW and closing in on February’s peak of 2,557.86, which was its highest level since August.

“We had quite a good movement and now we are in a core trading range between 2,460 and 2,558, but we remain bullish. This trading range is trend-confirming to the upside,” Petra Kerssenbrock, technical analyst at Commerzbank, said.

The broader FTSE Eurofirst 300 also added 1.1 percent, to 1,089.21 points – less than three points off peaks last seen in the summer.

The implied volatility on the Euro STOXX 50, a crude measure of investors’ risk aversion, dropped to its lowest level since July 2011.

Better risk appetite tends to favour more volatile stocks, and the average beta of the top 10 risers on the FTSE Eurofirst 300 on Tuesday was 1.33, showing that they are a third more volatile than the index.

Chiming in with the optimism on global growth, a survey by employment services company ManpowerGroup showed the hiring outlook has improved over the last three months in most large economies, including the United States.

Basic resources companies – which depend on strong global demand for the sale of things like copper – rose 2 percent as global commodity prices rebounded.

Investors also took a more sanguine view on the Greek debt situation after euro zone financeministers gave their final approval to a bailout package late on Monday, as expected, and corporates signalled they may not be as badly affected as some had feared.

The Greek bourse rose 0.63 percent after a 2.5 percent drop the previous session.

German reinsurer Munich Re added 3.2 percent after forecasting its net profit will more than triple this year as exposure to Greek debts “will at most lead to relatively low expenses”.

Financials, which tend to be volatile stocks that move with the twists and turns in risk appetite, generally fared strongly. The STOXX 600 banking index added 2.4 percent, while its insurance equivalent rose 1.4 percent.

There are still concerns the euro zone’s debt problems are not over, with Spain coming under pressure to aim for a tougher deficit target this year. Spain’s IBEX index has been one of the worst performers in recent days, but on Tuesday it rose alongside every other major European bourse, up 1.3 percent.

“This is possibly a halo effect coming from Greece,” said Luca Solca, global head of European research at CA Cheuvreux.

“But there is going to be another source of volatility coming when the market is going to realise that austerity does bring a significant GDP contraction.”

Volumes on the FTSE Eurofirst 300 were at 29 percent of their 90-day daily average, with some investors sitting on the sidelines ahead of a U.S. monetary policy decision.

The U.S. Federal Reserve is widely expected to hold a steady course on monetary policy and slightly brighten its tone on the economic situation, but investors will be eyeing the 1815 GMT statement for any clues as to the likelihood of further policy easing. Looser monetary policy is generally a positive for equity markets – unless it signals that the economy is in deeper trouble than previously thought.


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