European banking shares, hammered over the past few months, will be in focus next week as investors seek signs the sector will sustain a fragile recovery and trigger a Christmas rally. Rates decisions by both the European Central Bank and the Bank of England expected next Thursday, will be closely monitored.
While across the Atlantic, US jobs data for November will shed light next Friday on the outlook for the world's biggest economy as well as on rate moves. Fed Chairman Ben Bernanke bolstered hopes for more rate cuts on Thursday, saying a resurgence in financial strains in recent weeks had dimmed the outlook for the US economy, signalling an openness to further ease monetary policy.
After taking a beating in the first three weeks of November, European stocks started to rebound over the past three sessions, as rising rate cut hopes helped the market shrug off renewed worries over the credit crunch.
"The key element in the current credit crisis is the lack of transparency surrounding the banks' exposure. It amplifies volatility as jittery investors are left to guess the damage," said Christian Desbois, managing director at UFG Investment Managers.
"But we have regained ground over the past few days and we might see a rebound before the end of the year," he said. "It may sound bold at this point but, even though the lack of clarity makes it risky to reinvest in the banking sector, these stocks have started to look attractive again."
Despite a three-session rally, the FTSEurofirst 300 index of top European shares was on track to record its worst monthly performance since May 2006, down about 4.1 percent in November. Stocks have suffered from a flurry of huge write-downs by US and European banks related to the crisis in the credit market, sparked by problems in the US subprime mortgage market.
The DJ Stoxx European banking index, down 14 percent on the year, has managed to regain ground in the last few sessions, boosted by rate cut hopes as well as by news Abu Dhabi Investment Authority, the world's largest sovereign wealth fund, was buying a 4.9 percent stake of Citigroup Inc, a capital injection worth about $7.5 billion.
"The emergence of Asian and Middle Eastern funds buying stakes in western banks might be a sign we have reached a floor in the banking sector. It means some big investors think it's now time to buy," Desbois said. On Friday, Credit Suisse raised global banks to benchmark from 30 percent underweight, citing valuation.
"The price to book relative to the market of global banks is 13 percent below its average and only 6 percent off recession lows...the US and European banks appear extremely cheap. Cyclicals and banks have decoupled by an abnormally large degree," Credit Suisse analysts wrote in a note.
But the troubled banking sector may still face headwinds and a rebound could come only in 2008, said Thierry Deheuvels, CIO and General Manager of AGF Asset Management. "Current stock prices haven't yet completely priced in the drop in profits that the banking sector will experience. The storm is not over yet," he said.
"The impact from the credit crisis will continue to weigh on the stocks as we expect significant downgrades on earnings forecast, but at some point we will have to ask ourselves: was there enough discrimination among banking stocks? Are there good picks at this point? These questions will probably come some time in 2008." On the earnings front next week, investors won't have much to digest.
Capita Group reports final trade figures on Monday. ThyssenKrupp posts final results on Tuesday, while Tesco releases third-quarter trade figures. On Wednesday, Bouygues reports third-quarter results and Standard Chartered posts final trade figures. Final trade figures from Allied Irish banks and Royal Bank of Scotland will be released on Thursday.
On the macro front, France's producer price index data for October are expected on Monday, as is US ISM manufacturing and car sales data. The eurozone producer prices data for October will be released on Tuesday, while on Wednesday, eurozone retail sales for October as well as ISM non-manufacturing data for November are expected.