European Markets, Fundamentals

European Markets Continue to Fall as Credit Concerns Fuels Risk Aversion

Europe Session Key Developments

• Commodities Lower Despite Dollar Weakness
• Crude Falls on Rise in Inventory of Gasoline
• Sovereign Credit Ratings in Question

European markets ended the session lower following significant volatility as indices bounced between gains and losses throughout the day. Overall weakness was stirred by news events, even as fundamental indicators including U.K. Confidence and German trade figures remained strong. Key highlights include the British Exchequer imposing a 50% tax on bank bonuses, while further concerns in sovereign credit ratings hampered optimism. Following Monday’s announcement by S&P to a negative outlook on Greece, Fitch Ratings took a quicker step and issued a full-on cut, raising the value of credit-default swap contracts on government bonds. Today saw follow-through with S&P adding a negative outlook to Spain’s debt rating, a move that led the IBEX35 to drop sharply by more than 2%. Not helping the general atmosphere was further downside in commodities with oil racing towards $70 to the lowest level since early October, while gold’s collapse continued, lower by more than one hundred from its recent peak. Overall, the environment in equity trading appears to have started to shift following the US Non-Farm Payrolls last Friday. The release clearly showed improvement in the world’s largest economy and has led traders to move forward their expectations for rate hikes. Tighter monetary policy could limit potential upside in stocks, while economic growth is still likely to have a positive effect going forward.

FTSE 100             5,203.89              -19.24 -0.37%
British stocks fell the least of the five majors, down just over a third of a percent as losses reverberated across all but the Basic Materials sector. Nearly 75% of stocks traded lower with insurer Old Mutual down the most at 5.63% followed by hedge fund Man group, off 3.92% on news that net asset values declined. Ultimately Barclays led the index decline, as shares of the firm dropped 3.27% as financial aversion continued. Overall, further appreciation in the US dollar may be a significant hindrance on the FTSE as the proportion of affected raw material producers would be a drag on the benchmark index.

CAC 40                 3,757.39 -27.91              -0.74%
French equities closed lower by nearly three-quarters of a percent as financials led the index lower while four sectors fell more than one percent each. Losses were noted in 34 of 40 stocks with insurer Axa down the most at 3.98%. Across Europe, banks and insurance are feeling pressured as credit ratings for sovereign debt may be revised. This has considerable implications for financial sectors as cost to insure debt increases and potential losses may rise.

DAX                        5,647.84               -40.74               -0.72%
German stocks fell across the board with losses in more than 75% of stocks while all sectors fell, with the exception of Basic Materials. Industrials fell the most, down 1.79% while financials also dropped 1.53%. Indicators of Germany today showed the trade surplus increase significantly, due to a decrease in Imports. The fall may be a sign that domestic demand remains questionable and that economic growth is largely fueled by exports and global recovery from emerging nations.

IBEX 35               11,541.20              -267.70                   -2.27%
The Spanish index fell sharply to the largest decline of the five majors as rating agency S&P issued a negative outlook on the nation’s debt. The move sent nearly all stocks lower, with Financials down 3.56%. Builder Sacyr Vallehermoso fell the most with a loss of 4.46%. The nation’s two largest banks, Santander and BBVA fell more than three percent each to cause a drop of more than 150 index points.

FTSE MIB            22,236.23            -168.09               -0.75%
Italy’s benchmark index fell for the third consecutive day while ending near the mid-point of its range. Pressure in the financial sector due to credit concerns in Greece and Spain may see follow-through with issues in Eastern Europe, a region Italian lenders have held a hefty hand. The economy of Italy has started to grow, with GDP and PMI data indicating expansion in the third quarter that is likely to continue through the year end. As the index remains heavily financial weighted, weakness in major banks could lead to underperformance in the FTSE MIB.

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