Emerging market turmoil, deflation jitters knock European shares

Fri Jan 31, 2014 12:45pm EST

* FTSEurofirst 300 down 0.2 pct, Euro STOXX 50 off 0.4 pct

* Euro STOXX 50 breaks below support in bearish signal

* Europe stocks benefit from emerging market outflows-SG

* Luxury stocks buck trend as LVMH results reassure

By Blaise Robinson

PARIS, Jan 31 (Reuters) - European stocks fell on Friday, posting their first monthly loss since August and knocked by concerns that corporate earnings will be hit by turmoil in emerging markets.

Also rattling investors, data showed an unexpected drop in euro zone inflation, reviving fears that the currency bloc could be slipping into deflation.

The FTSEurofirst 300 index of top European shares ended down 0.2 percent at 1,291.17 points, posting a monthly loss of 1.9 percent. The index dropped as much as 1.6 percent during the session, before short covering in late trade helped it trim losses, traders said.

The euro zone's blue-chip Euro STOXX 50 index ended 0.4 percent lower at 3,013.96 points, with technical charts showing the benchmark index breaking below a positive trend line started in June, sending a bearish signal.

The Euro STOXX 50's next target on the downside is 2,916 points, representing a low that was hit in mid-December, and below that, the index's next big support level will be at 2,877 points, the 200-day moving average.

"It's most likely that the correction goes on until European indexes test their 200-day moving averages," said Lionel Duverger, technical trading strategist at B*Capital. "This should then bring interesting buying opportunities for the medium to long term, although we're not there yet."

EUROPE MORE EXPOSED THAN U.S.

Financial assets in a number of emerging economies have recently been rocked by the prospect of reduced stimulus from the U.S. Federal Reserve. The Fed announced on Wednesday a second cut in its quantitative easing programme, which had fuelled a sharp rally in global equities in 2013.

Reduced U.S. stimulus has prompted investors to repatriate investments from emerging markets, which have suffered massive outflows and sent a number of local currencies plunging.

European companies with strong exposure to emerging markets dropped again on Friday, with Austrian lender Erste Group losing 1.5 percent and global brewer SABMiller falling 0.5 percent. The two firms derive about two-thirds of their revenues from emerging markets.

According to data from MSCI, European companies have a much bigger exposure to emerging markets than U.S. or Japanese companies: about 24 percent of revenues overall for firms listed on the MSCI Europe index, versus 15 percent for the MSCI United States index and 14 percent for the MSCI Japan index.

Despite the market's recent pull-back, data shows European stocks continue to enjoy brisk investment inflows, in sharp contrast with massive outflows rocking emerging market funds.

According to Thomson Reuters Lipper, U.S.-based funds poured $450 million into European stocks in the week ending Jan. 29, bringing the total inflows so far this year to $3 billion. During the same week, U.S. investors pulled $2.6 billion from emerging markets equity funds.

"We see no early end to emerging market asset de-rating," Societe Generale cross-asset strategist Arthur Van Slooten said in a note, saying European stocks should benefit from geographical rotation from asset managers.

"The Fed remains assertive on execution of tapering despite recent turmoil within the emerging market world, which spells more turbulence ahead. While current emerging volatility is impacting developed markets as well, some of the flows are being redirected toward Europe, notably into Italy, Spain and the UK," Van Slooten said.

Shares in luxury goods makers bucked the trend on Friday, recovering from a recent slump after results from Louis Vuitton owner LVMH eased investor worries about the sector's outlook given China's slowing economic growth.

LVMH shares jumped 7.9 percent, while Hermes added 4.1 percent. But despite the day's rally, luxury shares remained in the red this month. The sector, seen as a safe-haven for fund managers during the heat of the euro zone debt crisis due to its strong exposure to emerging markets, has recently fallen out of favour.

Interactive map of emerging markets currency performance:

Europe bourses in 2014:

Asset performance in 2014:

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