European Stocks: markets eye earnings, commodity prices

14 May, 2006

European stocks, trading at three-week lows, will look to results next week to see if companies are taking a hit from surging commodity prices, while the outlook for the dollar is also key.
Earnings from banks, utilities and telecom firms top the corporate agenda. The ZEW institute will issue its latest investor sentiment data for Germany on Tuesday.
"We can expect a lot of volatility in the markets, so we favour defensive sectors, in particular, tobacco and pharmaceuticals," said Teun Draaisma, a European strategist at Morgan Stanley. " But we are less bullish about cyclical exporters - notably autos where we take a short view."
By 1400 GMT on Friday, the pan-European FTSEurofirst 300 index was down 1.3 percent at 1,374, hit by the dollar falling to one-year lows against the euro and other currencies.
The index was on course to end the week about 2 percent lower, distancing itself from a near five-year high of 1,407.5 struck this month. It is however still up 8 percent this year.
Surprises in Europe's first-quarter reporting season have mainly come from banks, insurers, automakers and oil companies but food firms have disappointed.
UK markets will keep a close eye on a big banking conference due in New York next week, where executives from companies including HSBC, RBS, Barclays and Standard Chartered are due to speak on Monday.
"I think we have seen the best of the cyclical cycle and are now favouring pharmaceuticals, life assurance and European banks which we feel are undervalued in the present climate."
Base metals and precious metals have repeatedly struck record highs on heavy flows of money from funds, far surpassing market expectations, with supply shortages supporting prices.
US crude oil prices hit a record high of $75.35 a barrel last month driven by persistent fears about supply disruptions.
Although analysts are starting to question how long companies will be able to cope with these high costs, the momentum in earnings growth still rolls on, at least for now. "The macro environment, driven by a weak dollar and continuing fears about inflation and growth, could make it hard for stock markets to consolidate gains," said Morgan Stanley's Draaisma.
Austrian oil and gas firm OMV, which surprised investors this week with a bid for utility Verbund also issues numbers on Tuesday. Bank Credit Agricole unveils results on Wednesday followed by Societe General a day later and BNP Paribas on Friday.
Among other results, Vivendi reports numbers on Wednesday along with results from Telekom Austria and preliminary numbers from UK supermarkets group Sainsbury on the same day.
BT and Air France unveil numbers on Thursday followed by British Airways on Friday.

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