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European shares bounce from weakness; banks gain

European shares bounce from weakness; banks gain
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First Published: Tue, Nov 22 2011. 07 25 PM IST

Updated: Tue, Nov 22 2011. 07 25 PM IST
London: European shares extended losses on Tuesday after US GDP data disappointed, showing a 2% increase in the third quarter versus consensus forecasts of a 2.5% rise.
At 7:21pm, the FTSEurofirst 300 index of top European shares was down 0.3% at 917.44 points.
In early trade, Stocks rose almost across the board, with those that suffered most in the previous session bouncing more. The STOXX Europe 600 Banking Index rose 0.6%. France’s BNP Paribas rose 1.2%.
But the banking sector has lost more than 38% in 2011, with many banks having to take severe writedowns on exposure to euro zone sovereign debt.
“This (the overall market) does not look like any weakness that one could buy into with a high degree of confidence,” Jeremy Batstone-Carr, strategist at Charles Stanley, said.
“Uncertainty over the positioning of the rating agencies is almost certainly going to mean that any bounce in the market is likely to be limited.”
Borrowing costs in the euro zone periphery remained major focus in the market. Spanish six-month bill average yields rose to 5.227% in an auction, compared with 3.302% at the previous sale.
HIGH PROFILE
US lawmakers abandoned their high-profile effort to rein in the country’s ballooning debt on Monday in a sign that Washington likely will not be able to resolve a dispute over taxes and spending until 2013.
The debt issues will continue to drive market sentiment, said strategists, and equities were unlikely to see much of a rally in the short term.
“You always get some kind of bounce after a fall-off, but the debt, the uncertainty hasn’t really changed,” said Andy Lynch, fund manager at Schroders, which manages 197 billion pounds ($311 billion).
“Absent some deus ex machina, time is the biggest healer. We need to see debt being paid down, so banks have capacity to fund economic growth. But that’s a six-month story, rather than a six-day story.
“We favour companies with decent balance sheets and good cash flow.”
Goldman Sachs cut its three-month target for the STOXX Europe 600 to 195 points, 13% below Monday’s close of 224.76, citing worries about the failure of euro zone policymakers to come up with comprehensive measures to avoid contagion in the sovereign debt crisis.
“The lack of initiative means weak fundamentals are likely to be a key driver,” Goldman strategists said in a note.
Batstone-Carr said there was support for equities from valuation measures such dividend yield.
Equity valuations on Thomson Reuters Datastream showed the STOXX Europe 600 carrying a one-year forward price-to-earnings of 9.4 against a 10-year average of more than 13.
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First Published: Tue, Nov 22 2011. 07 25 PM IST
More Topics: Markets Update | Europe | Stocks | Banks | Debt |