London: European shares retreated from one-week highs on Friday as hopes for more global stimulus faded and data disappointed, with cyclical shares such as banks and miners that suffer in a difficult economic environment featuring among the top losers.
However, expectations that Spain could get some help for its struggling banks in the coming days supported the Spanish banchmark share index and prevented European shares from falling further.
Figures showed German exports and imports fell sharply in April, in the latest sign that Europe’s largest economy is beginning to feel the chill from the euro zone debt crisis.
Sentiment also took a hit after Fitch slashed Spain’s credit rating by three notches late on Thursday and signalled it could make more cuts as the cost of restructuring the country’s banks spiralled and Greece’s crisis deepened.
Cyclical shares were the biggest losers, with European basic resources index, banks and autos falling 1.7 to 3.4% on concerns that the tough economic environment would hurt companies in these sectors.
At 4:38pm, the FTSEurofirst 300 index of top European shares was down 0.9% at 976.35 points after falling as low as 971.24 earlier in the day. It hit a one-week high on Thursday, helped by a rate cut by China.
The euro zone’s blue chip Euro STOXX 50 index fell 0.7% to 2,127.79 points. Charts showed the index could make some gains in the very near term, but remained vulnerable to deeper cuts going forward.
“The Euro STOXX 50 index is ready for a short-term consolidation after testing the horizontal 2,060 support level, but the upside potential is very limited. First strong horizontal resistance comes in at 2,190,” said Roelof-Jan van den Akker, senior technical analyst at ING Commercial Banking.
“But I am looking for the development of a lower top from where the next decline should start, possibly towards a longer term support at around 1,700.”
Analysts said that the lack of a clear hint late on Thursday from Federal Reserve Chairman Ben Bernanke on quantitative easing to help stimulate the U.S. economy and no change in the Bank of England’s policy led investors to believe that some stimulus measures were not imminent.
European shares closed off their highs and the U.S. market ended flat on Thursday, while many markets in Asia fell, forcing investors to trade cautiously in Europe ahead of the weekend.
Although sentiment remained fragile, European shares pared losses and Spanish stocks rose after EU and German sources said Spain was likely to request aid at the weekend, becoming the fourth and biggest country to seek assistance since the start of euro zone’s debt crisis.
“The only reason why the market has recovered is the fact that bailout of Spain is probably going to take place at the weekend,” the head of equity dealing at a London brokerage said.
He said companies were doing generally well, but the reason for the market’s nervousness was the lack of bold steps by European policymakers to resolve the debt crisis and hesitation of central banks to announce fresh measures to boost growth.
But some analysts said central banks would ultimately be prompted to step in during the coming months to keep the pace of economic recovery intact and that could favour cyclical stocks.
“We think the Fed will do more balancing work. Given where we are in terms of U.S. economic growth and given the fiscal cliff coming at the start of 2013, the case for added stimulus over the course of the next few months is quite strong,” Ian Richards, head of equity strategy at Exane BNP Paribas, said.
“You have got some pretty hefty push-pull forces. We believe that over time, macro catalysts will dominate and some of the fears that have been attributed to the euro zone are likely to be addressed by politicians.”
He said valuations of some defensive sectors such as food and beverages were at an elevated level and there was a better valuation case elsewhere in the market. Investors should buy Europe’s internationally exposed cyclical companies, he added.
European food and beverages sector trades at 15 times its one-year forward earnings, against 7.9 times for banks and 9.5 times for the STOXX Europe 600 index, according to Thomson Reuters Datastream.
“People are still looking for short-term opportunistic plays, which is leading to leading to volatility,” a London-based stocks trader said.