European Stocks Strike Back After Worst Day Since June 2016

(Bloomberg) -- European stocks are unsurprisingly rebounding from their worst day in more than two years.

Following a late reversal on Wall Street Thursday that restored the S&P 500 to little changed after an initial 2.9 percent slump, the Stoxx Europe extended gains to 1.4% as U.S. stock futures rose, Treasuries fell and the dollar weakened following disappointing jobs data.

Treasury yields slid to the lowest since August after disappointing private-sector jobs data prompted bets of a pause in the Federal Reserve’s rate hike path. U.S. payrolls and wages rose by less than forecast in November while the unemployment rate held at the lowest in almost five decades. The figures appeared less bullish than Fed Chairman Jerome Powell’s great confidence in the labor market.

So, while we’re enjoying a nice bounce today, below the surface the picture is less rosy for autos, one of Thursday’s biggest losers struggling as the laggard of Friday’s fight-back. Fortunes diverge widely among industry segments, with investors initially rushing into yield-sensitive sectors, along with consumer goods and services:

• Oil stocks soared in concert with oil prices after OPEC ministers salvaged a deal on larger-than-expected oil-production cuts
• Basic resources jumped after Trump tweeted that talks with China were “going very well,” though he supplied no details
• Technology climbed, tracking Nasdaq shares and benefiting from a boost after Broadcom’s forecasts

“Everyone is bearish, but no one is short,” BofAML strategists wrote in their fund management survey. “Inability of oversold markets to react positively to Trump blink, Fed blink indicates capitulation to lower credit and equity allocations has begun.”

But the starting point for capitulation to lower risk allocations is high, at 67 percent equity allocation for the world’s largest sovereign wealth funds, the strategists said. Equity allocation at BofAML is 60 percent and cash levels in long-only funds in the bank’s latest fund manager survey are less than 5 percent. Plus, there are still-high 35 percent to 40 percent net long positions at hedge funds.

What does all of this tell us? Investors started to buy the dip in a very cautious manner, but a growing sentiment that the Fed may slow down its hikes is pushing a risk-on mode.

There are still some uncertainties around the corner. Further civil unrest is expected in France, with the “Yellow Vests” calling for more demonstrations. The U.K. Parliament will vote on the Brexit deal on Dec. 11, while some Leave campaigners are quietly preparing for a second referendum according to the FT, and the ECB rate decision is next Thursday. That’s a lot to digest for investors who desperately need some peace and quiet after the market’s erratic moves.

To contact the reporter on this story: Michael Msika in London at mmsika4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, John Viljoen

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