Monday 23 April 2018

Debt crisis: European shares edge lower and growth worries persist

Spanish Prime Minister Mariano Rajoy
Spanish Prime Minister Mariano Rajoy

David Brett

EUROPEAN shares edged lower on Tuesday as worries over global growth and company earnings outweighed a boost from euro zone ministers approval of a bailout for beleaguered Spanish banks.

The FTSEurofirst fell 0.83 points, or 0.1 percent, to 1,029.26, adding to an almost 1.5 percent fall over the last four trading days due to weak data from China and the United States and concerns over the upcoming earnings season.

Worse than expected jobs numbers in the U.S. on Friday and more weak trade data from China overnight on Monday has given fresh cause for pessimism to a market worried about the outlook for global growth.

Euro zone finance ministers decision to grant Spain an extra year to reach its deficit reduction targets and set the parameters of an aid package for Madrid's ailing banks was broadly as expected and gave no sign of progress on activating the bloc's rescue funds to buy sovereign bonds.

"It will remain difficult for equities. Risk aversion will not disappear fast as it is fed by fears over the Euro and problems within will only be solved over a long period of time," Geert Ruysschaert, analyst at Fortis Bank in Brussels, said.

"While you have that uncertainty it is very difficult to sustain a flourishing equity market."

After a bullish start to the second half of 2012 when the FTSEurofirst gained more than 5 percent over three trading days, the rally has petered out around 1,050.

That level is technically significant as the 61.8 retracement of a fall which began in March - when euro sovereign debt worries resurfaced - and bottomed out at the beginning of June, as expectations of central bank intervention grew.

That intervention came in the form of rate cuts in Europe and China and more stimulus in the UK on Thursday, but data since has reinforced broader worries over the health of the global economy.

The upcoming quarterly earnings season is expected to show European company profits shrinking by 9 percent compared with a 4.5 percent expansion in the United States, according to Thomson Reuters Starmine data.

Aluminium producer Alcoa started the earnings season in the U.S. by posting a second-quarter loss overnight, but results, excluding one-off items, beat Wall Street estimates.

MINER RALLY

The update from Alcoa and data from China knocked sentiment among basic resource stocks, which had gained nearly 8 percent since the end of June.

"We have had a good rally in the miners, which outstripped wider market gains and the earnings overnight, although not cataclysmic, and China worries have dampened enthusiasm for the beaten down sector for the time being," a London-based trader said.

Highlighting just how tough it is for companies in the current macro economic environment in Europe, French catering-to-vouchers group Sodexo shed 4.1 percent after it said growth slowed in the third quarter as corporate clients reduced spending across Europe, although it kept its full-year targets.

UK peer Compass Group slipped 2.9 percent.

Bellwether British retailer Marks & Spencer echoed Sodexo's sentiment as it posted its worst underlying quarterly sales performance for three and a half years.

Marks & Spencer shares, however, rose 1 percent, having been shorted in advance, according to data from Markit.

Elsewhere on the upside, ASML Holding jumped 9.3 percent after Intel Corp said it would spend more than $4 billion to buy up to 15 percent of ASML and bankroll the Dutch company's research into costly next-generation chipmaking technology, a major vote of confidence in the European firm.

UK chipmaker and Intel rival ARM Holdings fell 1.8 percent.

Banks gained marginally early on along with the IBEX , although pared gains subsequently.

"After a lot of rumours surrounding the implementation of the Spanish bank assistance plan were not justified, they're still on track ... this might create a little bit better atmosphere (among investors) than over the previous few days," Fortis's Ruysschaert said.

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