European Markets, Fundamentals

European Markets Pare Gains Following Trichet Comments

Europe Session Key Developments

•    Dollar Strength Sends Commodities Lower
•    Central Bank News Afflicts Sentiment

European markets closed lower as comments by ECB President Trichet roiled sentiment. Investors remain cautious on the financial sector as future reforms may limit banks’ profitability. Initially, markets traded higher by approximately one percent with little news guiding the action as liquidity simply flooded in following declines since Tuesday. Ultimately, concerning news of tightening in monetary stimulus, and an ECB decision to tighten collateral against loans, led to selling pressure. Also affecting markets, specifically the FTSE100 and housing, is concern that recent price run-ups are nothing more than temporary response to low supply, with prices expected to fall in the year ahead. Ultimately, equities appeared poised for a strong showing this week following a significant rally on Monday. Since then however, stocks traded mixed prior to declines in the past two days to pare the advance. This may be telling of a top in place for markets, although the pace of advance makes a temporary consolidation seem almost necessary as investors remain clouded in their confidence. Overall, central bank fueled liquidity and a weakening greenback have largely stirred much of the gains in commodities and equities. As banks expect to begin pulling back on emergency lending and eventually raise rates, perhaps in early 2010, investors may hold a cautious stance on what has been an impressive rally in equities this year.

FTSE 100                      5,251.41                   -16.29               -0.31%
British stocks closed lower for a fourth day to end the week down nearly one percent. Largely affecting the move was a decline in commodities that sent miners and oil companies falling, while financial stocks moved lower by six-tenths of a percent as property stocks dropped. While malaise continues in the housing sector, and tighter capital controls for banks will start to be introduced, much of the selling may simply be due to the rapidity of the advance in recent weeks. Previous highs just above the current close may support the index, while any further upside in the US dollar could send commodities, and with it many of the firms trading in the UK, lower.

CAC 40                     3,729.36                  -30.86                 -0.82%
French stocks closed lower by nearly one percent as only three sectors gained while Financials tumbled 1.78%. Several firms with housing exposure saw declines of more than two percent including Societe Generale and lender Dexia. Overall losers today also included Stmicroelectronics, down 3.46% as technology stocks continue to drive lower. Overall the index has failed to set a new high since mid-October, and the weekly loss of 2.01% may mark further difficulties ahead.

DAX                         5,663.15                  -39.03              -0.68%
Similar to French stocks, German equities closed lower this week while failing to set a new high since mid-October. The key difference however is that weakness in the nation amounted to a drop of less than half of one percent while French firms suffer greater losses. Specific action today included losers outnumbering winners by a ratio of more than 2:1, while only two of nine sectors rose. Financials fell the most, down 1.55% on a 3.74% drop in Commerzbank and 2.71% move lower in Deutsche Bank as the ECB begins plans to implement tighter lending standards.

IBEX 35                     11,719.30                   -126.90                -1.07%
Spanish stocks closed lower this week by nearly one percent as nearly all sectors fell while Financials and Telecom dropped more than 1.3% each. Losers outnumbered winners by more than 3:1 while most of the decline can be attributed to greater than 1% losses for Banks Santander and Bilbao, along with Telefonica. Overall the index remains the best performer of the five majors, up more than 27% year-to-date, as the global recovery in the second half stands to benefit latin and south America significantly.

FTSE MIB                        22,511.68                    -311.54                  -1.37%
Italian equities fell the most on the session as the heavily-weighted financial sector took a large hit as the ECB prepares to tighten collateral requirements for lenders. The index fell sharply this week by 3.32% following failure to breach resistance at approximately 23,700. More than two-thirds of stocks closed lower, while phonebook publisher Seat Pagine fell the most at more than seven percent as the company reaffirmed its August projection for the full year. Larger firms affected the trade included declines of more than four percent in automaker Fiat and STMicroelectronics. Major banks also took a hit as UniCredit fell 0.63% while Intesa SanPaolo, Italy’s second-largest lender, dropped 1.93%. Concern in financials remains high and further difficulties will weigh heavier on the FTSE MIB than other European indices.

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