European Markets, Fundamentals

European Stocks Plummet in Final Hour as Dollar Recovers

Europe Session Key Developments

•    Crude Collapses in Final Hour of Trading
•    Financials Fall on Dilution Concern
•    German Confidence Unexpectedly Declines

European markets tumbled in the final hour of trading to losses of more than one percent as strengthening in the US dollar, along with lower oil prices, led to selling pressure across the board. Weakness was felt most in the financial sector, as traders sold banks on concerns that dilution will be used to exit government backed programs, as well as to make balance sheets more favorable. Chief among the news included Dutch banking giant ING group announcing its intent to split from the insurance business, along with a hefty €7.5 billion rights issue. Meanwhile in the UK, rumor circulated that Lloyds will present an 11.5 billion pound rights offer, along with plans to try to convert £11B of debt to equity. Other Financials suffering included a downgrade to HSBC by Citigroup to “hold,” while in the US, regional banks SunTrust and Fifth Third were downloaded by Richard Bove on concerns they may not profit until 2011. Data affecting the trade today proved minimal, while the only significant news proved to be grim as German consumer confidence unexpectedly fell for the first time since September 2008. Having rallied sharply off their lows, along with a further upshot since July, equities may indeed be seeing a pullback even as earnings reports have generally been well received. At the same time, top-line growth remains clouded by uncertainty and it remains to be seen whether consumers’ spending habits return to previous levels. Despite recent selling pressures, corrections in the near-term may be minimal at best given the breadth of confidence and sidelined liquidity ready for opportunistic buying.

FTSE 100                      5,191.74                   -50.83               -0.97%
Stocks in the UK fell the least of the five majors while most stocks declined and only one sector advanced. Declines in the financial sector led losers as Lloyds fell 7.16% on word the firm may dilute shareholders, while Royal Bank of Scotland fell 5.65%. A drop in commodities in the final hour of trading led to losses in the mining space which are likely to continue to drag the index if dollar strength continues. Ultimately, confidence in British equities remains higher than elsewhere in Europe as the prospects for a prolonged quantitative easing effort by the MPC could support against further downside. Overall, the index appears to be forming a top just below 5300. Consolidation continues.

CAC 40                     3,744.45                   -63.79                 -1.68%
French equities fell more than one percent as declines were noted in across all sectors while only four of forty stocks gained. As was the case in other European nations, Financials shed the most with a drop of 3.32% as dilution fears spread across the sector. Credit Agricole saw its shares fall 4.77% as the firm denied a rumor that it may merge with insurance group Groupama. Three other large firms fell more than four percent while the index moved to the lowest level in more than two weeks.

DAX                         5,642.16                    -98.09             -1.71%
Stocks in Germany fell nearly the most of the five majors as all sectors fell while only one firm in the 30 stock index advanced. Declines proved largest in Financials, while three other sectors saw losses of more than two percent. Allianz and DeutscheBank dropped the most at more than four percent, while losses in consumer services were also large as GfK reported a surprise drop in consumer confidence. Overall, the fall today put the contraction from recent highs at over four percent as the index approaches the lowest levels in nearly a month.

IBEX 35                     11,622.60                   -117.20                -1.00%
Weakness in the Financial sector caused a minimal fall in the Spanish index as investors perceived Banco Bilbao and Banco Santander as in a stronger position than most of their European counterparts. The index fell just one percent, while continuing to remain in a tight ban between 11,500 and 12,000. Overall, all but two stocks posted lower, while industrials saw the largest fall at 1.97%.

FTSE MIB                        23,001.56                    -419.00                  -1.79%
Italian equities fell the most of the five majors as losses were noted in an overwhelming majority of stocks, with financials leading losses as Intesa SanPaolo dropped 3.12% while UniCredit fell 2.01%. Other large movers included a decline of 5.15% in jeweler Bulgari, along with a 1.81% dip in automaker Fiat. From a larger standpoint, the index has fallen more than six percent from its peak, with decline stretching for the fifth consecutive session. A correction appears to be in place; however, the index may find support at the recent low at 22,500.

Written by Roman Kadinsky, CFDTrading Research
Please send any comments about this report to Rkadinsky@fxcm.com