European shares fell on Tuesday after concerns over the hit to earnings from weakening global growth weighed on sentiment and set up a test of chart support on a leading regional index. Those doubts have deterred many investors from extending the recent two-month stock rally in the run-up to the third-quarter earnings season in light of persistently sluggish economic data.
Miners, steelmakers and others in the metals industry are among the most exposed to that weaker sentiment and proved to be Europe's sectoral laggard, with a 1.2 percent fall that leaves them among the worst-hit in 2012, down 1.7 percent. "The real key to create confidence is positive earnings surprises, positive economic data surprises," Philip Isherwood, European strategist at Absolute Strategy Research, who is nevertheless 'overweight' on the region's stocks.
"We need to find fundamental support for the moves generated by 'Draghi-juice'," he added, referring to the rally spurred in part by European Central Bank President Mario Draghi's pledge to defend the euro and deal with the region's debt crisis. That rally has added nearly 16 percent to euro zone bluechip stocks, while the FTSEurofirst 300, which includes UK and other non-eurozone companies, has risen 8 percent.
On Tuesday, the broader index closed 0.3 percent lower at 1,101.89 points but managed to close off its lows and above the lower band of a chart trendline begun from the June 4 low. A sustained move below the line could signal further losses. Credit Suisse was among those cautioning about a correction in global equities on Tuesday, advising investors to "modestly" reduce risk in the near term even though they remain "overweight" on the asset class.
Adding weight to the index fall in heavy volume were share sales by French transport and power engineering company Alstom and Austrian lender Erste Group Bank. Alstom led European fallers, down 4.9 percent in volume nearly six times its 90-day daily average, after it raised 350 million euros to reduce debt and help pay for a 25 percent stake in Russia's Transmashholding.
Erste, meanwhile, was the second-most traded share, down 2.8 percent in volume nearly four times its average, after a major shareholder sold down part of its stake. Bucking the weaker European trend was Spain's bluechip bourse, up 1.1 percent to record its biggest daily gain since September 21, helped by an easing in the country's debt yields as it inches closer to a sovereign bailout.
While some expect such a bailout to help underpin European shares further, the conditions attached could yet be the cause of stock market volatility for both the IBEX and the broader market. For those looking to tap the potential for fresh market gains, but who are unwilling to buy the underlying stocks, HSBC's global head of derivatives, Franck Lacour, said many were using relatively low implied volatility to buy call options.
"Buying upside calls is an easy play if you want to be invested. It's a lack of conviction - they want to be in but not completely. If it was serious conviction, the market would be much higher and so would volumes." Expectations of future market swings, or volatility, as measured by the Euro STOXX Volatility index were slightly higher on Tuesday, up 1.2 percent to 23.15.
Since the Draghi-inspired rally, Spanish stocks have surged 30 percent, albeit from extremely distressed levels, and analysts at HSBC remained positive on their outlook. "We expect European equities to rise, boosted by QE (central bank money printing) and attractive valuations. Earnings and dividend forecasts are too pessimistic, in our view," HSBC said in a strategy note.