European shares pause on earnings concerns

Tue Nov 26, 2013 3:52am EST

* FTSEurofirst 300 down 0.1 pct

* China hits profits at Remy, Hugo Boss

* Charts show scope for more gain on DAX

By Toni Vorobyova

LONDON, Nov 26 (Reuters) - European shares lacked the momentum to extend a rally to multi-year highs on Tuesday, a mixed outlook for corporate earnings underlined by downbeat signals from Remy Cointreau and Hugo Boss.

Shares in Remy dropped 7.5 percent after the French spirits group warned of a double-digit decline in full-year operating profit because of a slowdown in China.

Subdued demand from China also hit performance at the German fashion house, shares falling 3.5 percent after it delayed its 2015 profit target.

Investors had been expecting earnings to pick up this year as the European and global ecomomy improves, but so far this has not happened and momentum - analyst upgrades minus downgrades - remains mired in negative territory.

"European equities are beginning to be a little bit stretched based on the fact that earnings expectations have not completely reversed ... You are seeing the forward (price-to-earnings) multiple rising, but the forward expectations for earnings are actually flat and that's not normally a very healthy sign," said Peter Garnry, strategist at Saxo Bank.

"I think it will change as we move into the new year and everyone begins to revise up their targets for the euro area economy."

The FTSEurofirst 300 was down 0.1 percent at 1,301.33 points , pausing below a 5-year high of 1,316.42 set earlier this month.

Monday marked the fourth quietest day so far in 2013 on the FTSEurofirst 300, with volumes a third below the year-to-date average, and traders braced for a similar pattern on Tuesday.

Longer term, though, most analysts and investors remain upbeat on equities, albeit forecasting slightly more modest gains than seen in the last two years. As such, Goldman Sachs sees STOXX Europe 600 at 360 points by the end of next year - a gain of 11 percent from current levels -- after a gain of 15.9 percent so far in 2013 and 14.4 in 2012.

Technical charts, too, pointed to the scope for more gains, including in the German DAX, so far the only major blue-chip European index to have followed Wall Street to record highs this year.

"While the recent strength in the DAX is reflected in overbought readings on the daily, weekly and monthly RSI (relative strength index) studies, recent price action remains constructive," said Chris Wright, analyst at Informa Global Markets.

"Scope is therefore seen for further near-term strength towards the 9,500.00 psychological resistance level ... where we may see some profit-taking. However, with the 10,000.00 level coming into view, any dips are viewed as corrective as bulls look to resume the uptrend."

On Tuesday, the food and beverage sector fared the worst, down 0.7 percent as Remy's news hit peers like Pernod Ricard and Diageo.

On the flip side, Repsol was the top gainer, rising 3.5 percent after the Spanish oil major announced it reached a preliminary deal to get paid for the 51 percent stake in Argentina's main energy company YPF that the Argentine government seized in 2012.