Eurozone equities nudged higher on Monday as market talk of fresh measures from policymakers to help the region's troubled banking sector sparked a rally in battered Spanish, French and Italian stocks, eclipsing a drop in the German DAX. Frankfurt's industry-heavy index, which had shown resilience to the eurozone debt crisis over the past few months, dropped 1.2 percent on Monday, hurt by fears of a slowdown in growth in both the United States and China following lower-than-expected macro data.
The eurozone's bluechip Euro STOXX 50 index closed 0.5 percent higher at 2,078.96 points in muted trading volumes as UK markets remained closed for a holiday. The eurozone banking sector, which had tumbled 36 percent since mid-March, regained 3.4 percent, with Intesa SanPaolo up 5.8 percent, Banco Santander up 4.9 percent and Societe Generale up 3.5 percent. "We're seeing buying flows coming from bargain hunters picking up banking shares on the back of speculation of intervention from central banks," said Frederic Rozier, a fund manager at Meeschaert Wealth Management in Paris.
Traders also mentioned short covering, while the euro currency gained ground and Spanish and Italian bond yields retreated, as speculation that a policy response to the escalating debt crisis may be in the works prompted some investors to lock in profits made recently in betting against eurozone assets.
Earlier on Monday, officials from France and the European Commission signalled their support for an ambitious plan to use the eurozone's permanent bailout fund to rescue stricken banks. However, Germany has so far opposed any use of bailout funds without a country having to submit to an austerity programme imposed by the EU and the International Monetary Fund, while deeper changes in the eurozone could take months or years to agree and implement.
Germany's DAX fell 1.2 percent, adding to Friday's 3.4 percent drop when the benchmark index broke below a major support level, its 200-day moving average, sending a bearish signal from Europe's strongest benchmark index year-to-date. Automaker Volkswagen shed 3.2 percent, tech firm Infineon fell 3.2 percent and cement giant Heidelbergcement dropped 3 percent. "There has been a downward gap on the Nasdaq, a strong support broken on the STOXX 600, the DAX has pierced below its 200-day moving average, and the Bund yield is moving towards 1 percent... risk aversion is on the rise," Aurel BGC chartist Gerard Sagnier said.
"It's too early to go contrarian, the risk of revisiting the lows of 2011 is still very serious, so we recommend selling into the rebounds." Wall Street's S&P 500 index also broke below its 200-day moving average on Friday and was losing ground again in early trade on Monday, sending a strongly negative technical signal.
Data from EPFR Global shows Europe equity funds saw broadly-based redemptions again last week as investors, spooked by the deterioration of Spain's banking sector and the country's regional finances, continued to trim their exposure to the eurozone. "The surprise this week is that the numbers weren't higher, given events in Spain," EPFR Global Research Director Cameron Brandt wrote in a note. "But I think the fact top-notch European equity is so cheap relative to US equity, and the fact such a big share - on average - of their earnings come from outside the eurozone, is limiting the damage," he says.
The eurozone's bluechip Euro STOXX 50 index trades at 8.4 times 12-month forward earnings, compared with price-to-earnings ratios (P/E) of 11.9 for Wall Street's S&P 500 and 9.3 for the MSCI Emerging equity index, according to Thomson Reuters Datastream.
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