Equity markets look set to remain volatile with inflation and interest rate worries as well as renewed terror fears and the ongoing Israel-Lebanon conflict outweighing healthy corporate profits and low stock valuations.
"Inflation trends that are not to the taste of central bankers and related interest rate risks, as well as the tense political situation in the Middle East and renewed terror fears are behind the sour mood," said Frank Schallenberger, equity strategist at Landesbank Baden-Wuerttemberg.
The European earnings reporting season for the quarter to end-June draws towards its close next week. Swiss bank UBS and German utility E.ON - both due to release results on Tuesday - are among likely eye-catchers.
Investors exposed to Russian gas export monopoly Gazprom will monitor closely the newly elected Ukrainian Prime Minister Viktor Yanukovich's August 15-16 Moscow visit after last winter's supply row, which briefly cut Russian gas supplies to Europe through pipelines in Ukraine.
Investors will also be focused on the quarterly index review by MSCI, which takes place on Thursday with changes coming into effect on August 31. The second phase of rebalancing in Russia's Gazprom is expected in the emerging markets review. Eurozone second-quarter GDP data on Monday and July inflation on Thursday top next week's European macro-economic agenda. US July PPI numbers are due on Tuesday followed by CPI on Wednesday.
"Monetary policy uncertainty remains the dominant theme," Bankgesellschaft Berlin Capital Markets said in a note. "The phase of uncertainty in the equity market may continue until autumn when a positive outcome of the next earnings reporting season could lead to improved sentiment," it said. By 1220 GMT, the FTSEurofirst benchmark of Europe's 300 leading shares was up 0.2 percent on the day but 1 percent off last Friday's close.
It has risen some 11 percent over the past year compared with a gain of below 3 percent for the US S&P 500 index. In addition to UBS and E.ON, next week's European corporate earnings calendar contains top-300 members such as Austrian oil and gas group OMV on Thursday and Britain's WPP Group Plc, the world's second-largest advertising company, on Friday.
US earnings that will be watched closely in Europe include home-improvement stores chain Home Depot on Tuesday, cosmetics maker Estee Lauder Cos Inc and computer maker Hwelett-Packard Co on Wednesday as well as computer maker Dell Inc and apparel retailer Gap Inc on Thursday.
Citigroup and ABN Amro said fundamentals ought to support equities, Citigroup arguing that investors were "too cautious." "We expect robust profit and dividend growth. Equity valuations are still appealing in our view," Citigroup said in a weekly European Portfolio Strategist report. ABN said in a research report that "a compelling set of fundamentals should be sufficient to see equities rally from current levels the macro backdrop still appears `pro-equity'."
"Consensus forecasts for 2006 are still being revised upward reflecting the strength in the bottom-up news flow," ABN said. But Lehman Brothers had a warning for investors keen on telecoms stocks, many of which offer high dividend yields.
"After three downgrades from large cap telcos this quarter France Telecom, Telecom Italia and Deutsche Telekom and payout ratios reaching high levels in the historical context, we believe there is more downside than upside risk to forward dividend assumptions," Lehman said.
"Despite sustained underperformance since early 2005, we do not expect the telecoms sector to outperform until earnings momentum moves into positive territory," Lehman said in a note. The DJ EuroStoxx telecoms index has lost over 11 percent over the past year.
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