London: European equities hit one-week lows on Monday, extending their decline into a fourth session, as glum global economic data hit miners and a top German retailer offered fresh proof of the euro zone crisis impact on corporates ahead of the earnings season.
Softer than expected Chinese inflation, along with weak numbers from Japan’s services and manufacturing sectors led economic concerns following a disappointingly weak US jobs report on Friday.
For equities, one silver lining would be if weak data prompts more stimulus action, such as a third round of quantitative easing from the US Federal Reserve. For now, though, that is far from a done deal, while the European Central Bank last week dashed some investors’ hopes of more long-term refinancing operations (LTRO).
“That’s clearly a slowdown that is a bit harder than was expected by the markets,” said Benoit Peloille, equity strategist at Natixis. “So we try to play that in terms of switching towards sectors with domestic exposure (in Europe).”
Telecoms, seen as a more domestically focused sector and, whilst recently unloved, also offering some defensive characteristics as well as relatively high dividend yields, were among the top performers on Monday, up 0.4%.
In contrast basic resources, which rely on strong global growth to fuel demand and prices, fell 1.2%.
The FTSEurofirst 300 was down 0.4% at 1,029.82 points by 3:43pm. With summer holidays starting to take their toll on volumes, it took an hour of jittery morning trade either side of the day’s no change mark before the index finally gave up on the technical support offered by the 100-day moving average around the 1,034 mark and settled in to the red.
The Euro STOXX 50 was down 0.7% to 2,219.81 points, after a similarly jittery start, adding to a drop of 3.7% in the previous three sessions.
“The net result of last week’s price action on the weekly chart is a shooting star - a reversal pattern favouring the bears,” technical analysis firm FuturesTechs noted, adding that a break of support at 2,215 would strengthen the bear case.
Spain underperformed, with the IBEX shedding 1.8%, as a euro zone finance ministers kept the spotlight firmly on the region’s debt crisis, with investors wondering how long it might take to agree on the fine print on the recently announced batch of rescue plans.
“There is a risk, in our view, that a decision will not be reached on Monday on all the pending issues and that an extra meeting ... will be needed,” strategists at BNP Paribas said.
“The markets could see this as an invitation to test the willingness of creditor countries to really step in and support the peripheral countries.”
With Alcoa kicking off the US second quarter earnings season on Monday and Europe following next week, investors will be watching how economic weakness has impacted corporate profits.
The aluminium giant is seen managing only a 5 cent per share profit for the past three months, bruised by weak prices for the metal, and prompting investors to push short interest in the stock to record highs, according to Markit.
In Europe, Metro, the world’s No.4 retailer, said it would not escape the impact of the European debt crisis, which was hitting demand in Germany. Its shares fell 6%, the biggest faller among European blue chips.
Earnings at euro zone blue chips are forecast to fall 5.5% year-on-year in the second quarter, on average, according to Thomson Reuters Starmine data, and strategists at UBS see “risk of disappointment” even from such a low base.
“We suspect any confirmation of a widening global slowdown and threat to margins will be pounced on,” they said.
“Sectors that are trading at high premiums relative to long-run average P/E (price-to-earnings) multiples and where earnings momentum has started to fall may be at risk such as tobacco, beverages, general retail and consumer durables.”