Markets

European equities fail to sustain optimism from Wednesday’s rally in US

Europe’s markets reopened after the Christmas holiday amid elevated volatility and thin volumes

The FTSE 100 hit a fresh two-year low on Thursday despite stock markets around the world recording significant gains by the end of Wednesday.

Thu Dec 27 2018 - 11:37

European equities failed to sustain optimism from the Wednesday rally in US stocks as the region’s markets reopened after the Christmas holiday amid elevated volatility and thin volumes.

The Stoxx Europe 600 Index fell 0.9 per cent, after opening 0.5 per cent higher. The Euro Stoxx 50 Index was also down, poised for a bear market. Trade-sensitive sectors, such as miners and automakers, paced the retreat. The markets were shut for Christmas on Tuesday and Wednesday.

European equities are set for their worst year since the 2008 financial crisis as a mix of political and economic concerns have fueled outflows of about €60 billion from the region's stock funds. Although the S&P 500 Index soared the most since 2009 on Wednesday on signs of robust consumer spending, fewer concerns about the tenure of the Federal Reserve chief and progress on US-China trade talks, US futures traded lower Thursday and the VIX Index advanced.

"It's a combination of nervousness, growth fears and in particular Brexit uncertainty. Liquidity is very thin, and political risks are more severe for Europe," Ulrich Urbahn, head of multi-asset strategy and research at Berenberg in Frankfurt, said. "The hope is that with some re-balancing flows at the end of the year and new risk budgets at the beginning of next year, markets will find a bottom."

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Brexit volatility

The European volatility gauge, VSTOXX Index, was up 22 per cent on Thursday, trading near levels in February, when investors first saw major corrections in global equity markets. Political issues in Europe this year have spanned the UK's failure to vote on Theresa May's Brexit deal, Italian budget squabbles as well as French protests and uncertainty over Germany's future after Chancellor Angela Merkel outlined her eventual plans to leave office.

The worst-performing sector this year in Europe is banks, with a loss of 29 per cent, due to company-specific developments such as a regulatory raid on Deutsche Bank as well as investor disappointment over the prolonged decision of the European Central Bank to keep rates on hold.

Automakers are the second-worst performers with a drop of 28 percent due to the uncertainty over US tariffs on a broad range of imported vehicles and the US-China trade war.

"The trade issue is still a very big one," said Tim Graf, head of EMEA macro strategy at State Street Bank and Trust.

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