European shares waver

Summary

Water-tight justifications for chasing stocks further off recent lows are few and far between, and European markets are indeed wavering.

Bargain hunt fizzles

Momentum from early week bargain hunting offered Europe’s STOXX its first set of three straight rising days since late September, earlier before gains fizzled. Sentiment is backed by less alarming perceptions on a host of geopolitical flare ups assailing risk appetite, but perhaps these are not supportive enough. Washington’s conciliatory comments, for instance, only went so far – proposing EU, UK and Japan talks, but not mentioning China. Indeed, the ‘stock market rebound’ has not extended to Shanghai’s Composite which is still nursing a small loss for the week to go with its 22.5% 2018 slide. Nasdaq 100 and DAX are posting modest weekly upticks. Trade dispute-linked sectors also fail to respond to the overtures. Cars and parts makers’ shares are lower.

Threatening Fed

Reversals highlight the extension of a rally by steel and mining stocks this week above the broader market. Reduced aversion on the metals complex, as a proxy for ‘emerging’ factors, is another sign this year’s flight from such assets is being reassessed. Similarly, Trump’s ‘benefit of the doubt’ for Saudi Arabia may leave a stink in the air, but pragmatically, it also reduces expectations that the top OPEC member could deploy oil supply as retaliation. After all, comparing Saudi and the Fed, President Trump chose Fed tightening as his “biggest threat”. That inadvertently (and probably immaterially, from a longer-term perspective) paved the way for more dollar weakness, undermining Treasury yields though they still lurk near challenging values. On the same theme, Netflix’s strong quarterly results overnight should not necessarily equate to an ‘all-clear’ for giant U.S. web firms. But it’s further temptation for a return to position taking whilst geopolitical risks look static.

European flag

European equities are flagging similar ambivalence heading into mid-session with a dip to acknowledge a less than sure footed start to the earnings season. Additionally, acknowledgement in Rome that its contentious Budget could well be rejected by Brussels and that a rating downgrade could be on the horizon also nudges sentiment a little lower. Ahead, remaining scheduled event risk is led by Fed minutes, whilst the Brexit impasse is also being discussed. There’s a gap between earnings from global titans. Travelers and American Express are the next remaining DJIA components with earnings reports scheduled this week. They’re joined on Thursday by Unilever, with Caterpillar’s next Tuesday. Consequently, continued risk-seeking could again hinge mostly on dollar and yield currents. At 3.17%, the U.S. 10-year yield is sticking to its 3.12%-3.187% range since Treasury sellers visibly baulked at higher levels last Thursday. These are also comfortable levels for equities, albeit wary ones.