Merger and acquisition activity gave European shares some relief on Thursday after a tech-led sell-off across global markets earlier in the week, but the STOXX 600 still posted its worst quarter in the last two years. The STOXX 600 ended the month on a positive note, up 0.44 points at 370.87 points, but closed the quarter down 4.7 percent despite starting with a global equities rally in January.
The quarter developed into a challenging one for stock markets with investors navigating a sharp spike in volatility, rumbling trade tensions and anxiety over the tech sector.
In Europe, slowing macroeconomic indicators have been taken as a "sell" signal for equities, which had enjoyed a lift most of last year on expectations of stronger economic growth. "Support from attractive valuations and fading FX headwinds is not enough to override the signal from relative macro surprises," said Deutsche Bank equity analysts, reaffirming their underweight position on European equities versus the US Auto stocks led gains as Renault jumped 5.7 percent to a more than 10-year high after Bloomberg reported the French firm was in talks to merge with Nissan.
Hopes of dealmaking spread to other auto stocks, driving them up too. Daimler, Peugeot, Porsche and Volkswagen rose 3.4 to 4.4 percent. M&A also drove stock gains in other sectors. GKN shares surged about 9 percent after Melrose Industries announced it had narrowly clinched its 8 billion-pound ($11 billion) takeover of the British engineer after a three-month battle for control of the FTSE 100 company.
Meanwhile services group Sodexo sank 15.7 percent after cutting its full-year sales and profit margin outlook, reporting a weaker than expected second quarter. "Given management guidance, we see potential for consensus EBIT downgrades of over 10 percent and material share price pressures, near term," said UBS analysts.
While cyclicals like autos and industrials had a positive session, defensive sectors have also enjoyed something of a revival as investors rush to areas traditionally seen as safer, with stable earnings and high dividends. "Should concerns about a trade war escalate, defensive stocks would likely outperform ... We would be wary of cyclicals, in particular international ones," wrote Goldman Sachs analysts.
Positioning on cyclicals is elevated, Barclays analysts found. Both European and global funds have increased their cyclicals exposure to near the highest levels in the last decade, adding especially to financials, tech and industrials.