European stocks snapped a four-session rally on Monday, with news of a recession in Spain putting the euro zone’s economic and debt problems back in the spotlight and charts pointing to more market weakness as long as a key resistance level holds.
Spain’s IBEX index finished April down 12.5 percent in its worst monthly showing in nearly 1-1/2 years. Investors braced for more turbulence in May, when the second round of presidential elections in France and parliamentary polls in Greece could shake the euro zone’s ability to reach a consensus on how to deal with debts and clamber out of recession.
“On a macro front, or political front, in Europe things aren’t looking so great … I am cautious in the short term,” James Butterfill, equity strategist at Coutts, said. The Euro STOXX 50 index of euro zone bluechips closed down 1.6 percent at 2,306.43 points on Monday. The pan-European FTSEurofirst 300 fell by a more modest 0.8 percent, cushioned by the presence of Nordic stocks.
Strategists at JPMorgan said that Spain would likely remain the underperformer in Europe, while Germany – which is up 15 percent for the year-to-date – and Britain would do well.
Euro STOXX 50 has lost 8.2 percent in April, its worst monthly showing since August 2010.
Volumes on Monday were at just 74 percent of the 90-day daily average, with some investors extending their weekend in anticipation of a holiday on European bourses on Tuesday.
A run of relatively solid corporate reports had enabled the index to stage a tentative recovery last week, but it stumbled against technical resistance at the 200-day moving average which – around 2,348 – also acted as its ceiling on Monday.
“It still has a strong obstacle in the form of 200-day moving average … In order to change (the outlook) to the positive side we need to break above,” Dmytro Bondar, technical strategist at RBS, said, adding that weakness would likely be limited by the bottom of the recent range, at 2,280.
Data from EPFR Global showed outflows from European equities totaling $4.6 billion last week – the biggest in eight months. Spain, Italy, Greece and the Netherlands, however, enjoyed small inflows, suggesting that some bargain hunters believe the region will manage to resolve the three-year-old crisis.
“Our European equity mutual fund flow sentiment indicator fell sharply … into the region that, in our view, reflects very depressed sentiment levels and historically has acted as a useful contrarian buy signal,” Nomura strategists wrote.
One thing that could persuade investors back into Europe is corporate profits, with strong results driving sports goods maker Adidas 5.3 percent higher on Monday.
Of the STOXX 600 companies which have reported first quarter results so far, 58 percent beat or met earnings forecasts, up from 52 percent for full year 2011, according to Thomson Reuters StarMine data. Butterfill at Coutts noted that the beats came against a fairly low base of expectations, but said that overall the earnings picture was supportive for the market.
“If the markets begin to price a euro zone breakup, but ultimately avert this scenario, as was the case in September 2011, then we could see a further downside of 8.7 percent, bringing the Euro STOXX 50 to 2,115 level,” he said.
“However, the markets have already priced for disappointment in Spain and a less favourable outcome in the France/Greek elections. This, supported with better than expected corporate results means unless the markets see greater probability of a euro zone breakup then the recent correction doesn’t have much further downside.”
