September 2, 2011 / 7:16 AM / 8 years ago

Recession concerns derail rally in European shares

LONDON (Reuters) - European shares fell sharply on Friday, snapping a four-session rally, on concerns that U.S. non-farm payroll numbers could signal the world’s biggest economy was headed for a recession, with charts signaling a bearish outlook for equities.

Financials came under renewed pressure, with Greek banks .FTATBNK falling 4.3 percent and Greek shares .ATG down 3.2 percent after the country said on Thursday it would miss its budget deficit target. The Thomson Reuters Peripheral Eurozone Banks index .TRXFLDPIPUBANK fell 3 percent.

Concerns that the euro zone debt crisis could spread to countries such as Italy and Spain have been keeping investors jittery. Focus returned to Greece, with an official saying talks between the country and European Union, International Monetary Fund and European Central Bank inspectors on whether it has met conditions for a new aid tranche have been put on hold.

The STOXX Europe 600 banking index .SX7P fell 2.5 percent, weighed by a New York Times report that a lawsuit was being prepared to be filed against big U.S. banks such as Bank of America (BAC.N) and Goldman Sachs (GS.N) over mortgage securities.

Investors fear that if banks are forced to pay out billions for mortgages that defaulted, the suit could sap earnings for years and contribute to further losses across the financial services industry.

At 5:47 a.m. EDT, the FTSEurofirst 300 .FTEU3 index of top European shares was down 1.6 percent at 957.38 points after rising 0.7 percent in the previous session. The index fell 10.6 percent in August and is down 14 percent so far this year, with recent macroeconomic data raising fears about a recession.

“I think the job figures are going to be worse than expected. It could be a wake-up call for the market and share prices could go down even further,” said Koen De Leus, strategist at KBC Securities, in Brussels.

“Expectations of the QE3 (another round of quantitative easing) have helped shares in the past days, but at the end of the day, the market needs better economic environment that stimulates growth and company results.”

The U.S. non-farm payrolls data is expected to show an increase of 75,000 jobs, although market talk points to the possibility of a much lower number at 8:30 a.m. EDT, following a decline in the employment component of the Institute for Supply Management’s factory activity index on Thursday.

“Despite the fact we recently got some better than expected economic releases, recession fears are dominating the markets. The U.S. jobs report, the mother of all economic releases, will be quite important. A weak figure may bring QE3 a step closer,” said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

BEARISH TECHNICAL OUTLOOK

Automobile shares featured among the biggest fallers, with the sector index .SXAP dropping 2.9 percent on concerns that slower economic growth will hurt global demand for vehicles.

Technical analysts said the Euro STOXX 50 .STOXX50E, the euro zone's blue chip index, could fall back toward the 2,170 area where it had got the trendline support connecting the recent lows. The index was down 2.2 percent at 2,254.79 points.

“It looks like the damage done in July and August will likely resonate for many months to come. Although it’s going sideways at the moment, it’s going sideways at lower levels and ultimately that doesn’t bode well for the index,” said Phil Roberts, chief European technical strategist at Barclays Capital.

“The long-term negative outlook is based on the successive closes below the 12- and 24-month averages and historically that hasn’t been a bullish signal,” he said adding that the near-term upside target for the index was 2,359.

At a time when the market was concerned about poor macroeconomic numbers, a global recession and the eurozone debt crisis, ABN AMRO Private Banking, which manages 170 billion euros ($242 billion), said it was optimistic and had become ‘overweight’ on equities last month from a ‘neutral’ stance.

“Recession risks are probably higher, but there are many factors working against recessionary forces. The impetus should come from emerging market economies and we may be bottoming on the U.S. manufacturing cycle,” said Didier Duret, global chief investment officer at ABN AMRO Private Banking.

ABN AMRO increased its exposure to information technology companies and consumer discretionary shares.

“We are in a step-by-step approach toward increasing the risk in the portfolio because we think that the value is there. We find dividend yields higher than bond yields in a lot of stocks and this is not something that happens frequently,” Duret said, adding that low equity valuations were another compelling reason to increase its exposure to equities.

Echoing a similar view, HSBC strategist Garry Evans said economic growth in developed economies was likely to be sub-par for a long time, but equities may still do okay as emerging markets growth remains robust, allowing earnings for U.S. and European companies the chance to grow at a faster pace than their local economies.

“Moreover, equity returns have poor correlation with economic growth in the long run. Valuations matter much more. On most measures, equity valuation is back to the level of the early 1980s,” he said.

According to Thomson Reuters Datastream, the STOXX Europe 600 index carried a 12-month forward price-to-earnings ratio of 8.7, the lowest since early 2009, against a 10-year average of 13.2.

Additional reporting by Dominic Lau; Editing by Helen Massy-Beresford

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