London: European shares rose on Tuesday, extending their rally into a seventh straight session, though in low volumes ahead of the reopening of US markets after a long holiday weekend.
Halfway through the European trading day volumes on the FTSEurofirst 300 index of leading European shares were at just 25% of their 30-day daily average, following on from a similarly thin session on Monday.
Concerns about the Greek sovereign debt situation and economic slowdown in China “had made investors rather too risk-averse and withdrawn from the market” prior to the rally, said Jacob de Tusch-Lec, manager of Artemis’s 32 million pound Global Income Fund.
Fredrik Nerbrand, global head of asset allocation at HSBC, said he remained cautious, especially about the regional debt crisis and other headwinds, and described the rise as “relief, more than anything else”.
“I’m still relatively cautious. Leading indicators are coming down; valuations are no longer really that supportive, they’re no longer that much of a buffer; you’re looking at earnings downgrades coming through etc,” he added.
Leading the blue-chip gainers was the world’s second-biggest retailer, Carrefour , up 3.9% after listing its Spanish discount chain, in which each shareholder will get a stake.
Carrefour stood out against the bulk of French blue-chips, however, with the CAC-40 down 0.3% at 1106 GMT, against a 0.2% gain for the FTSEurofirst 300 .
A record slowdown in the French service sector, as well as falls across the euro zone and fresh selling in heavyweight banks after falls in the previous session, weighed on the CAC-40, keeping it below the 4,000 mark.
“It’s quite a big resistance level on the CAC,” said Scott Reinert, trader at IG Index.
While French lenders including Societe Generale and BNP Paribas fell further, down around 0.6%, weighed by bearish comments from Standard & Poor’s on Monday about a Greek debt rollover plan, Reinert said he had yet to see panic selling, and analysts at Citi were more bullish.
“We remain overweight on French banks, and our analysis suggests sovereign and earnings fears are overdone. French banks have underperformed the sector by 3% over the last 3 months and continue to trade at an 18% discount to the sector, based on 2012E earnings, even after the recent rally,” they said in a note.
While the stock market rallied last week on increased optimism about the near-term handling of the Greek sovereign debt crisis, volatility had tumbled, said Franck Lacour, HSBC’s derivatives trading head.
“We’ve experienced a dramatic crash of volatility. For the same strike, we’re talking about several points move on the short-term, and volatility was not very high.
“So, it seems like a lot of people are hedged or quite long gamma, or were quite long gamma going into the various meetings deciding on the Greek fate, and now they feel they don’t need the gamma anymore, and they’re trying to get rid of it.”
Gamma is one of the key inputs into option pricing formulas. It measures how sensitive option prices are to movements in the price of the underlying asset.
The expectation of a “quiet summer” was driving part of that move, Lacour said, but he was less sanguine.
“July volatility is below 15 vol; we’re talking about 12.5 on the FTSE, 14 on the DAX, which is incredibly low for the amount of stress in the system.