European equities recover, cheered by US data

Mon Apr 16, 2012 1:21pm EDT

* FTSEurofirst 300 up 0.5 pct

* U.S. retail sales data cheers after steep stocks drop

* Spain underperforms as bond yields break above 6 pct

By Toni Vorobyova

LONDON, April 16 (Reuters) - European shares regained poise on Monday, as stronger-than-expected U.S. retail sales data gave investors the excuse to jump back into the oversold asset class, partly eclipsing concern about Spain's mounting debt costs.

The pan-European FTSEurofirst 300 closed 0.5 percent higher at 1,032.43 points. The Euro STOXX 50 index of euro zone bluechips rose 0.4 percent, rebounding after its worst week in four months when EPFR data showed investors continued to move money out of European equity funds.

The sell-off has seen the Euro STOXX 50 drop nearly 12 percent in the past month to dip into the red territory for the year-to-date. That has pushed it into oversold territory below the 30 mark on the 7-day relative strength index (RSI), to levels last seen just before a sharp rebound in November 2011.

"On a very short-term basis markets are beginning to get a bit oversold. Any 10-12 percent drop on a four week view is a bit extreme, assuming no events unfolding," said Stewart Richardson, partner and chief investment officer at RMG.

"At the moment, although we are bearish on Europe, we did ... tone that down just a little bit. But we would be happy to add that short exposure back on again if the markets do bounce for a few days, or a week or two."

A key catalyst for Monday's rebound came from U.S. retail sales, which rose 0.8 percent month-on-month in March, more than double the pace forecast by analysts. The data boosted confidence in the health of the world's biggest economy, which is seen as a key source of income for European companies at a time when the euro zone languishes in a recession.

"The retail sales data was quite favourable. The U.S. economy clearly is currently outperforming the euro zone on aggregate so it makes sense to seek some exposure," James Buckley, European fund manager at Baring Asset Management, said, recommending holdings in export-focused companies.

"If you look through the short-term noise, the valuations (on European equities) are attractive."

Brighter global growth prospects were a key factor cited by HSBC on Monday as it forecast that the FTSEurofirst w ill add nearly 100 points to end 2012 at 1,130 and earnings across the region will grow by around 6 percent this year.

"To forecast positive growth when the euro zone economy is in recession may appear optimistic but we find that European earnings are influenced more by global than European economic growth," HSBC's strategists said in a note.

"Value sectors should perform strongly because they are likely to benefit from the sheer fact that the wheels have not fallen off the recovery. This points particularly to financials and energy," they added, highlighting companies such as Total.

Shares in the French major added 1.5 percent, while the STOXX 600 oil and gas sector rose 0.8 percent.

The biggest gainer on the FTSEurofirst was International Power, up 3.2 percent in nearly 20 times average daily volume after GDF Suez took control of the British firm through a sweetened offer.

PAIN IN SPAIN

On a national level, Spain's IBEX was one of the few losers, down 0.6 to 7,209.10 points. Technical analysts at SEB said that following a slump to 3-year lows on Friday, the index could soon extend losses beyond the March 2009 low of 6,702.60.

Spanish 10-year government bond yields broke above the 6 percent mark on Monday for the first time since the beginning of December as investors worry that a recession may hinder the government's ability to meet deficit targets and require some kind of international bailout.

JP Morgan recommended holding on to long bets on the German DAX - which closed up 0.6 percent - versus Spain.

Underlining investor concern, safehaven German bund futures hit a new record high on Monday. But according to Societe Generale, whose proprietary sentiment indicator has turned higher, concerns about Spain could be overdone.

"We think it is time to think contrarian and turn bull again on equities, as investors have cashed out their gains from the last equity rally," its strategists said in a note.

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