European stocks sagged on Tuesday, snapping their eight-session winning run in a broad retreat led by mining and oil shares, but analysts said the pull-back was technical and the market's upward trend remained intact. The FTSEurofirst 300 index of top European shares closed 0.5 percent lower at 1,150.81 points, ending a two-week rally during which it gained about 4 percent.
The benchmark, however, managed to end above the session's low as well as above a key support level, the 23.6 percent Fibonacci retracement of the recent rally, at 1,149.49 points. Volume on the index was less than its 90-day average daily volume, showing that Tuesday's pull-back hasn't happened in strong volumes which would have been a bearish signal.
Miner Xstrata fell 2.4 percent while oil major Total shed 0.7 percent, as commodity prices retreated on renewed worries over demand. "We're talking about a short-term pull-back here which looks like a bull trap as a lot of buyers who jumped in late are now stuck. But on the longer term, the catalysts for growth in corporate profits are still in place," said Franck Nicolas, head of global asset allocation at Natixis Asset Management, which has 302 billion euros ($448 billion) in assets under management.
Around Europe, the UK's FTSE 100 index gained 0.2 percent, reopening after a long holiday weekend, while France's CAC 40 lost 0.3 percent. Germany's DAX index, which had moved into overbought territory two sessions ago, lost 0.4 percent. Shares of Deutsche Bank fell 2.1 percent after the US government sued the German lender for more than $1 billion, accusing it of defrauding the government by repeatedly lying to obtain federal insurance guarantees on mortgage debt.
"The DAX is still in a positive momentum and its performance since mid-March is not surprising," said Frederic Dodard, head of multi asset class solutions at State Street Global Advisors France. "German shares continue to be attractively valued in terms of financial ratios."
The DAX trades at 10.5 times expected earnings, below the index's 10-year average of 13.4, according to Thomson Reuters Datastream. By comparison, Europe's broad STOXX 600 index trades at 10.6 times expected earnings, and the S&P 500 trades at 12.9 times expected earnings. Despite the broad positive view on European stocks, the euro currency's steady rally towards the key psychological level of $1.50 is reigniting worries for the region's exporters and will likely break the strong correlation between the euro and eurozone equities seen in recent weeks.
The 30-day rolling correlation between the single currency and the eurozone's blue chip Euro STOXX 50 index, which has a 20-year average of -0.1, peaked at +0.61 last week and looks poised for a reversal. "North of $1.50, we're out of the comfort zone," a Paris-based equity trader said. "Not that the whole market will turn bearish, but people will become reluctant to buy exporters' shares, at least until we see how bad the damage is on their results."
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