Friday 15 December 2017

European shares hit by new bout of stimulus worry

EUROPEAN shares fell to six-weeks lows on Tuesday on fresh concern that central bank support for markets was turning more cautious, and some expected further weakness in the near term.

The pan-European FTSEurofirst 300 index closed down 1.2pc at 1,179.57 points, marking its lowest close since ending at 1,155 points on April 22.

The euro zone's blue-chip Euro STOXX 50 index also fell, down 1.3pc to 2,683.20 points. Euro zone government bond yields, meanwhile, rose across the board.

Traders cited disappointment at an overnight decision by the Bank of Japan against fresh measures to calm its bond markets, while persistent worries that the U.S. Federal Reserve may soon scale back its stimulus programme also hit markets.

"It's getting more serious by the day. Bond yields are creeping up, and that's having an adverse effect on equities," said XBZ European equity options broker Mike Turner.

"Technically, I think there's more downside to go. On the Euro STOXX, we could fall another 2pc to 2,600 fairly easily," he added.


The sell-off was a broad one across all sectors, with miners hit particularly hard as the STOXX Europe Basic Resources Index - which includes major mining stocks - fell 2.5pc.

Darren Courtney-Cook, head of trading at Central Markets Investment Management, sold DAX futures contracts at 8,278 points on Tuesday and felt the DAX could fall down to 7,500 points over the next month.

He said traders had turned more negative after a market rally last Friday, which followed strong U.S. non-farm payrolls jobs data, failed to hold this week.

"The bulls failed miserably after the non-farm payrolls. I'm a seller," said Courtney-Cook.

However, Courtney-Cook and many other investors still felt that any market pull-back over the next two months will soon be followed by a resumption of an upwards trend for equities.

Equities remain supported by the fact that they offer better returns than bonds, where returns have been hit by rate cuts and liquidity injections by central banks, and Morgan Stanley said its clients favoured European shares over the next 12 months.

"Seventy-six percent of investors thought equities would be the best performing asset class over the next 12 months - the highest reading we have since at least 2006. In addition, 49pc of our audience chose Europe as the best performing region over the next 12 months which is also the highest since at least 2006," wrote Morgan Stanley.


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