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Stocks reverse earlier gains but optimism still high for rally

EUROPEAN shares fell early today, reversing most of the previous session's strong gains on renewed concerns over the US Federal Reserve's stimulus measures, although the recent rally is seen as having further to run.


French car maker PSA Peugeot Citroen dropped 3.9pc, falling after a news website said the French automaker is considering a new capital increase after burning through €2.5bn in cash in the past year.

At 0740 GMT, the FTSEurofirst 300 index of top European shares was down 1pc at 1,234.20 points. The euro zone's blue chip Euro STOXX 50 index was down 0.9pc at 2,808.47 points, retreating from July 2011 levels hit yesterday.

"In terms of technical analysis, this week's surge means that we're in for another positive wave, at least until the end of next week," said David Thebault, head of quantitative sales trading, at Global Equities.

"At that point, US jobs data, which is the only clear barometer for the Fed's quantitative easing programme, will set the tone, and it will probably be time to book profit."

European stocks have gained about 10pc since mid-April, boosted by massive liquidity injections by central banks.

However, the rally has been losing steam in the past week after robust US macro data - including yesterday’s consumer confidence and home price data - sparked speculation that the US Federal Reserve might soon start to scale back its quantitative easing programme.

"The strong consumer confidence data, which is certainly linked to the rise in home prices, shows that US economic growth should pick up pace," said Arnaud Poutier, head of IG France.

"In the short term however, it's seen as a double-edged sword by the market, because stronger data could prompt the Fed to trim its QE programme. But in the longer term, we all prefer economic growth and solid fundamentals than life support from central banks," he said.

Around Europe, UK's FTSE 100 index was down 1.2pc, Germany's DAX index down 1pc, and France's CAC 40 down 1pc.

Stocks seen as defensive featured among the biggest losers, with Roche down 1.7pc and Vodafone down 1.5pc.