European shares recover as market eyes Cyprus compromise

Wed Mar 20, 2013 1:46pm EDT

* FTSEurofirst 300 rises 0.3 pct, Euro STOXX 50 up 1.4 pct

* Equity markets rebound after 3-day losing streak

* Investors eye fix to Cyprus problems

* Sanofi hits 7-year highs on Aubagio hopes

* Some traders caution over buying stocks at current levels

By Sudip Kar-Gupta

LONDON, March 20 (Reuters) - European shares broke a three-day losing streak on Wednesday as investors bet on policymakers finding a fix for Cyprus' bailout problems, although some traders cautioned against buying up equities at current levels.

The pan-European FTSEurofirst 300 index closed up 0.3 percent at 1,198.88 points while the euro zone's blue-chip Euro STOXX 50 index rose 1.4 percent to 2,708.90 points.

A 2.5 percent gain at Sanofi added the most points to the FTSEurofirst 300 and sent the drugmaker to 7-year highs, as traders cited speculation that Sanofi could get regulatory approval for its Aubagio multiple sclerosis treatment pill.

European banks also featured on the FTSEurofirst 300 leaderboard, on expectations that policymakers would find some solution for Cyprus' funding crisis to prevent any major repercussions from Cyprus' troubles.

Union Bancaire Privee fund manager Rupert Welchman felt the support of the European Central Bank (ECB) was sufficiently strong to prevent any major market hit from Cyprus, which rejected a proposed levy on bank deposits as a condition for a European bailout earlier this week.

"You've still got the ECB saying it will provide liquidity," said Welchman, whose portfolio is overweight on northern European financial stocks.

"Cyprus will, of course, be a clear negative for European sentiment and it is a new and substantial negative, but the bigger picture is that Europe is trying to follow a roadmap to recovery and in this quest, Cyprus is a sideshow," he added.

CAUTION AGAINST BUYING ON DIPS

In spite of Cyprus' woes, investors have stuck with a longer-term bullish outlook for European equities.

Equity markets have been propped up by injections of liquidity by the world's central banks, and a Reuters poll this week forecast that the Euro STOXX 50 would rise to 2,800 points by the end of June, and to 2,935 points by the end of December.

The broader STOXX Europe 600 index was seen rising to 305 points by end-June and to 317 points by the end of 2013.

Investors have been encouraged by pledges from the ECB last year to defend the euro currency, which led to stock markets rallying in the second half of 2012.

Expectations that problems over Cyprus and Italy's political deadlock will only cause a minor, short-lived pull-back on equity markets in March and April have led some investors to buy up shares on days when stock markets fall.

However, technical analysis firm Lowry Research said investors should wait for better opportunities to buy into the German DAX and Euro STOXX 50, since both indexes looked set for short-term weakness.

"Market conditions in Germany are representative of the European region as a whole. The longer term outlook is positive, yet there are signs of near term weakness and increased selling into the recent breakout to new rally highs in the Euro STOXX 50," said Lowry Research senior vice president Tracy Knudsen.

"As is the case for the DAX, new buying in the Euro STOXX 50 should be avoided for now, as a market correction should offer a more optimal entry point," she added.

JN Financial derivatives trader Rick Jones expected equity markets to trade sideways this week but added investors would look to book gains made on equities since the start of 2013 next week before the Easter holidays.

Since the start of 2013, the FTSEurofirst 300 has risen around 6 percent. The Euro STOXX 50 has gained some 3 percent while the DAX has risen 5 percent.

"In the near term, we see sideways trading with a downward bias," said Jones.

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