Business | Markets

Growth fears punture European share rally

Sentiment backed by hopeful signals from US budget talks

Reuters
Published: 16:45 December 7, 2012

Image Credit: Reuters
The Frankfurt stock exchange. Germany’s Bundesbank cut its growth outlook less than 24 hours after the European Central Bank reduced its own economic forecasts.

London: A rally in European shares ran out of steam on Friday after the region’s leading economy cut its growth forecasts, puncturing optimism prompted earlier by expectations of progress in US budget talks.

The FTSEurofirst 300 index traded unchanged at 1,131.50 points at 0840 GMT, having risen 7 per cent since mid-November and hit 18-month highs on Thursday on expectations a ‘fiscal cliff’ of tax rises and spending cuts that could stall the world’s largest economy will be avoided.

But Germany’s Bundesbank cut its growth outlook for the country on Friday, less than 24 hours after the European Central Bank slashed its economic forecasts for the Eurozone.

Germany’s DAX index was down 0.1 per cent.

“You cannot stand in the way of the numbers, which tell us Europe will be in a recession next year and earnings will be poor,” Justin Haque, a broker at Hobart Capital Markets, said.

The FTSEurofirst 300 index recorded gains in December in 12 of the last 15 years, and some traders are betting on another rally this time, fuelled by fund managers adding to their positions to enhance their performance before the end of the quarter.

“(But) if you want to capture the year-end rally you’ll have to be long,” Haque said.

He estimates the Eurozone blue-chip Euro STOXX 50 , also flat at 2,602.22 on Friday, could rise to 2,650 by the end of the year before falling back to 2,450, a support level tested several times in the fourth quarter.

Italian concerns

Italy’s FTSE MIB shed 0.9 per cent, the worst performing major index in Europe, with banks weighed down by concerns Mario Monti’s government, put in place last year to promote an austerity and reform agenda, could fall.

Former premier Silvio Berlusconi’s party withdrew its support for Monti on Thursday, raising the risk of a snap election, but President Giorgio Napolitano said he would work to avoid a crisis and there was no need for alarm.

If the government does fall, an election would likely be called only a few weeks earlier than the expected date in early March, but this would upset nervous investors.

But William De Vijlder, chief investment officer for strategy & partners at BNP-Paribas Investment Partners, said the European Central Bank’s pledge to buy the debt of countries that apply for financial aid provided reassurance for investors.

That meant a repeat of the sharp share price volatility seen in 2011 was unlikely.

“On the financial side, it seems things are under control thanks to the (ECB’s) preparedness to provide guarantees,” he said.

The Euro STOXX 50 volatility index, which gauges option prices on Eurozone blue chips and is regarded a measure of investor expectations of future share price swings, was up 1.8 per cent at 17.29.

It was rebounding from a five-year low of 16.26 hit last month, but was well below a high of 60 reached in the summer of 2011.