European Markets, Fundamentals

European Stocks Continue to Recover from Recent Correction

Europe Session Key Developments

•    Commodities Higher as Dollar Weakens
•    Earnings/Fundamentals Lift Sentiment

European markets rallied from the open to close close to the top of the trading range. While ultimately markets remain in a bearish trend which began several weeks prior, traders are starting to return to optimism as fundamental data and earnings reports continue to prove favorable for broad recovery. Indicators today included British confidence remaining at its recent high, while European PMI showed expansion in UK and EU service sectors. Elsewhere, in the US, ADP’s National Employment Report posted worse than expected, but only slightly, while the previous month saw a narrower revision to layoffs. Also, earnings affecting the trade included better-than-expected profit across sectors including French bank Societe Generale, British retailer Marks & Spencer, and oil company Total. Despite optimism rising on the releases, news yesterday largely played a factor as well as investors took in the decision for what would happen to major banks Lloyds and RBS, while an EU report raised the growth forecast for the region. Ultimately, markets have corrected a fair bit off their highs and recovery today merely brings the indices back to levels approximate to the close on Monday. Stocks have seen similar sized contractions since July however, and all were notably brief and quickly recovered from. It remains to be seen whether the current downswing is one which will continue through to the year-end or whether sidelined liquidity will quickly fill the gaps. The current week is likely to affect markets as central bankers in Europe and elsewhere meet to give rate decisions and statements on the economy. Any waning in the outlooks and confidence is likely to be met with considerable selling pressure.

FTSE 100                      5,107.89                   +70.68               +1.40%
British stocks rose more than one percent on the strength of greater than three percent gains in Basic Materials and Technology. Financials also climbed more than two percent today, helping to offset weakness on Tuesday. As most stocks climbed with miners leading the pace as commodities advanced, optimism appears to be returning to equities following the recent dip. Ultimately, recovery in commodity prices off recent weakness may help to continue propelling the FTSE to outperform indices in Germany and elsewhere.

CAC 40                     3,670.33                   +86.08                 +2.40%
French equities rose the most of the five majors following strong earnings at oil company Total and lender Societe Generale while nearly all stocks advanced. Sectors leading the charge included Technology rallying an impressive 4.27% while Financials and Basic Materials are up more than three percent. Tech communications firm Alcatel-Lucent gained six percent following clearance of a product by the FDA. Meanwhile, the biggest market movers came mostly from earnings reports in Total, up 1.66%, and Societe Generale, up 4.56%. BNP Paribas, set to report tomorrow, also rallied 3.46%. The French economy is growing at a faster pace than other major European nations and is likely to see higher growth as a result.

DAX                         5,444.23                  +90.88              +1.70%
German stocks closed up nearly two percent on gains across all sectors while only one of 35 stocks tracked traded lower. Largely affecting the move were Consumer Services and Goods, both climbing more than two percent each. As the German economy is highly focused on exporting, demand noted in figured such as the Baltic Dry Index as well as regional trade reports will need to be closely watched to gauge improvement. The Baltic Dry Index, a measure of shipping prices for commodities has risen to the highest since early August. Meanwhile, demand appears to be growing in exports and imports in nations including China and the US. Fundamental improvements bode extremely well for Germany, while the overall DAX remains more than 7% off its recent highs.

IBEX 35                     11,387.70                   +145.30                +1.29%
Spanish equities closed higher by the least of the five majors as nearly a quarter of the 35 stock index closed down. Advancers included the nation’s two largest banks, as well as large firms including Telefonica and apparel Inditex. Today’s recovery leaves the index still at the lowest levels since early October, while the year-to-date increase in the IBEX remains the largest of the five majors at nearly 24%. Ultimately, confidence in Spain’s financial sector is higher than elsewhere in Europe as the nation’s main banks, BBVA and Santander, were less exposed to the financial crisis and prior asset price bubble. Consequently, lending in the recovery should be vibrant and the country may experience quicker growth than its counterparts elsewhere.

FTSE MIB                        22,385.73                    +438.82                  +2.00%
Stocks in Italy rose more than two percent to close at the highest in four days. As financial fears spread of increasing capital and government interventions in the industry including breaking up major firms, the index had fallen sharply off its highs by as much as more than 10%. The FTSE MIB temporary broke below 22,000 several times over the course of recent days as sentiment remained higher over an uneven recovery. Fundamentals today contributed to the advance as Italy’s service sector surprisingly grew for the first time in 23 months.

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