European stocks fell from 14-month highs on Monday as traders cashed in gains awaiting clarification on whether Spain will seek financial aid to tackle its debt crisis. The FTSEurofirst 300 index of European shares closed 0.3 percent lower at 1,116.58 points after hitting highs not seen since July 2011 on Friday, boosted by stimulus pledges by the European Central Bank and the US Federal Reserve.
Volume on the index was thin at 83 percent of the 90-day average, in contrast to brisk trading in the previous sessions, showing support behind the down move was relatively weak. "If you're trading, these are good levels to play for a correction, also considering no further key announcement is due in the short term. But I would be very careful and lock in profit quickly," a pan-European, Milan-based broker said.
"It depends on what kind of investor you are. If you're a fund manager I would remain in the market as it seems to me there is no scope for sharp downside moves." Spain must formally ask for a bailout and agree to stringent terms before the ECB can make good on a promise to start buying the country's bonds and doubts remained over when - or whether - Madrid would make a move.
Spain's Banco Santander dropped 0.8 percent and Italy's UniCredit fell 1.1 percent. They weighed on the Euro STOXX 50 index, which closed 0.4 percent lower at 2,583.57. The blue-chip euro zone index triggered a technical "sell" signal in the previous session by failing to break above strong resistance at 2,611 points, a peak hit in mid-March.
Charts on the index's September futures pointed to a period of consolidation in the very short term, with the contract possibly shedding up to 2.8 percent to revisit last week's lows, according to Philippe Delabarre, a technical analyst with Paris-based Trading Central. Delabarre highlighted the formation of a rising wedge, a pattern normally associated with the imminent reversal of a prevailing trend.
In addition, the contract's 14-day Relative Strength Index was facing resistance at around 70, a level it had been unable to break during previous rallies in July and August. The Euro STOXX 50 index has rallied 20 percent since the ECB president Mario Draghi pledged in late July to do whatever it took to save the euro.
The co-ordinated Fed and ECB action had boosted prospects for growth-linked assets, luring some long-term investors back into European equities after a three-year-long debt crisis had sapped appetite for the region. European equity funds posted their biggest inflow since early May in the seven-day period through last Wednesday, according to data from EPFR Global.
"From a valuation and liquidity perspective it is likely that Europe will be seen as a host for any money coming back into equities," said Bill O'Neill, Merrill Lynch Wealth Management's chief investment officer for Europe, the Middle East and Africa. Merrill Lynch Global Wealth Management, which has $1.8 trillion in client balances, turned slightly "overweight" from "underweight" European equities last week.
It bought into the Euro STOXX 50 index, as well as adding exposure to funds invested in European equities, with a focus on picking stocks offering battered valuations. "Managers will be particularly focusing in areas that have been laggards and where fundamentals seem to be stabilising," O'Neill said. "That would be the banks and energy." European energy and banking shares traded at 8.6 and 8.1 times their expected earnings for the next 12 months, compared to 10-year averages of 10.1 and 10.6, respectively, Thomson Reuters Datastream data showed.
O'Neill's views were echoed by HSBC, which tipped sectors offering historically cheap valuations. The bank's strategists flagged possible shocks to equity markets due to the US fiscal cliff, doubts about whether Spain will apply for an international bailout and the political succession in China. Apart from banks and energy, they recommended utilities and telecoms as good value plays.
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