European equities snapped a four-day rally on Friday as investors, already disappointed at a lack of U.S. monetary stimulus, positioned for a possible batch of weak Chinese economic data over the weekend. Cyclical stocks led the selloff as markets feared a surprise interest rate cut in China On Thursday signalled the impending release of grim economic data, while the U.S. Federal Reserve quashed market hopes for a cash injection. “Yesterday (Fed Chairman Ben) Bernanke disappointed and the market reacted badly,” Lorne Baring, managing director of B Capital Wealth Management, said. “Equities are attractive at the current levels but we have to exercise caution because of the macro overlay, defined by the European crisis and the risk of a Chinese slowdown.”
Baring had been “underweight” equities since April but started building up positions more recently, estimating an 11 percent sell-off in global equities since late March was overdone as central banks in the United States and China would eventually intervene to shore up the world’s largest economies. China, the world’s second largest economy and top metal consumer, cut its deposit and interest rates on Thursday, sparking speculation the move was a prelude to worse-than-expected second quarter economic data over the weekend and sending basic resources shares down 2.8 percent. “We suspect that this rate and deposit cut indicates that underlying inflation is going to fall a lot more than people expect,” Credit Suisse strategists said in a note. They were “strategic bears” of mining stocks on concerns about investments and house prices in China, the world’s largest consumer of metals, but acknowledged there was scope for a “tactical trade” on the sector, which had been “oversold” on overly pessimistic expectations for U.S. growth after recent weak data. Despite their recent rebound, metals & mining stocks were still trading at the lowest valuation multiple of all components of the STOXX 60 index at 14.8 times their expectedearnings for the next twelve months, compared to a 17.3 multiple for the broader index.
