European Stocks: banks to set tone for beaten-down markets

Bruised European equities investors will look closely at a handful of banks' earnings next week, seeking signs of respite for a sector littered with losses linked to a crunch in credit markets. Inflation indicators from both the US and UK should also provide further clues on the timing of interest rate cuts even as central banks voice concerns about economic growth.
European shares have fallen in recent weeks as banks including Merrill Lynch and Citigroup announced billions of dollars in shock write-downs which cost chief executives of both banks their jobs.
"There is a bit of generalised panic going on because people just don't know the scale of the credit losses or the scale of portfolio writedowns which have to be made because of the turbulence in credit markets," said Andrew Bell, European strategist at Rensburg Sheppards Investment Management.
By 1450 GMT on Friday, the pan-European FTSEurofirst 300 index was down 1.55 percent at 1,512, its lowest level since September 19 and down 7 percent from the annual highs. The benchmark is up 2 percent so far this year, well short of the 15 percent gains made by this time last year. The DJ Stoxx banking sector index was down 2.2 percent on Friday, at its lowest level in about two years, falling about 12 percent seven straight sessions.
Banks UniCredit, Credit Agricole, insurer Zurich Financial Services and financial services group Dexia are among the companies reporting results next week. Utility, steelmaker Arcelor-Mittal and telecom firms Telefonica, Vodafone and Cable & Wireless also issue earnings.
European company earnings are mostly coming in line with market expectations though financials remain a sore point. "For next couple of weeks, markets are trapped between support from the earnings side for non-financial companies and good valuations on the one hand and the negative impact from the credit crisis on the other side," said Tamoo Greetfeld, an equity strategist at UniCredit in Munich.
"And so far one cannot see from a fundamental point of view what would be a trigger strong enough to really start a new upward movement in the short term." The mining sector is likely to remain in focus after BHP Billiton's bid for Rio Tinto sent the sector into ferment this week.
And across sectors, the dollar's weakness against the euro will be watched carefully. The greenback hit a record low of $1.4752 to the euro on Friday, and further weakness will weigh on shares of exporters.
"Earnings are holding up okay. The euro is beginning to appear as a problem for earnings because even companies which had hedged their business before have to roll over the hedges," said Rensburg Sheppards' Bell. "The euro is beginning to sting European companies and it is also obviously beginning to cause political tensions.