Frankfurt: European shares rebounded on Tuesday as investors returned to risky assets, shrugging off German investor sentiment dropping to its lowest level in nearly three years and a downgrade of Italy’s credit rating by Standard and Poor’s.
The pan-European FTSEurofirst 300 index of top shares was up 1.2% at 926.81 points at 5:04pm, following a 2.3% fall on Monday.
Traders said euro zone issues had not disappeared and the gains may not reflect a turnaround in sentiment as midday trading volumes were low at 33% of the 90-day average.
Europe’s main investor fear gauge, the VDAX-NEW volatility index , was down 5.4% at 42.52, erasing most of Monday’s jump, signaling investors’ appetite for risky investments was recovering.
“Risk assets have bounced from opening lows”, a trader said.
ABN AMRO Private Banking said it cut its cash holding to become “overweight” in equities and recommends investing in cash generative companies and real estate firms to avoid the euro zone woes.
“We recognise the challenges posed by the euro zone debt crisis, but have a route for investors to put capital to work whilst minimizing the risk of emotional decisions,” said Didier Duret, chief investment officer of ABN AMRO Private Banking.
In credit markets, the cost of insuring against an Italian default rose after a sovereign debt ratings cut by S&P, while there were still worries Greece may not be able to cut its budget deficit enough to avoid default.
In the stock markets however the move seemed to be already priced in, a German trader said.
Investors also ignored a drop in German sentiment, polled by the ZEW economic think tank, to its lowest level since December 2008.
“The recent falls in all leading indicators show that the financial market turmoil triggered by the Eurozone debt crisis has spilled over into a loss of business and consumer confidence,” said Berenberg Bank analyst Christian Schulz.
UTILITIES RISE, AIRLINES DIVE
Shares in European utilities were among the best performers with Germany’s RWE and E.ON, up 3.5% and 4% respectively, leading the gainers after a court ruling which could scrap a German tax on nuclear power.
Several analysts have said in recent days that political risks for these shares have peaked and they are set for a recovery. RWE is down 48% so far this year. E.ON has lost 31%.
Societe Generale and BNP Paribas were among the biggest decliners on news German engineer Siemens had withdrawn cash from Societe Generale and sources saying China had halted European swaps with French banks due to the region’s problems.
Airlines dived to the bottom of a 0.3% weaker STOXX Europe 600 Travel & Leisure after Deutsche Lufthansa cut its outlook.
Lufthansa lost 5%, while Air France-KLM dropped 4.1%. “It doesn’t bode well for the sector, which has already been suffering for a while,” a trader said.