European Stocks Rise as Fed Decision Adds Fuel to Relief Rally
(Bloomberg) -- European equities advanced for the third day as investors were reassured that the scaling back of stimulus measures by the Federal Reserve will be commensurate to the pace of economic recovery.
The Stoxx 600 Europe Index closed 0.9% higher. Banks and technology sectors led the gains, while travel and leisure and personal care stocks underperformed. U.K.’s FTSE 100 Index underperformed other major markets, closing little changed as the pound jumped on the Bank of England’s comments on a stronger case for tightening.
With valuations stretched following a rally that pushed gauges to successive records, concerns that global growth is now past its peak, and supply-chain bottlenecks have clouded the outlook in recent weeks. The Fed brought relief to equity investors after saying on Wednesday that it’s on track to start scaling back asset purchases this year, but left the door open to extend stimulus if the economy needs it.
Strategists Say Global Markets Can Ride Out Fed Tapering
And even though surveys of purchasing managers by IHS Markit showed that business activity in the euro area “markedly” lost momentum in September, markets were unfazed.
Berenberg economists led by Holger Schmieding said risks including the spread of the delta variant and worsening supply shortages are “manageable and mostly temporary.” Temporary corrections in equity markets wouldn’t be a “major surprise” after the rally in stocks, they wrote in a note.
Earlier, stocks pared gains after a report that Chinese authorities signaled reluctance to bail out Evergrande, even as Beijing injected more cash into the financial system and regulators instructed the embattled property developer to avoid a near-term default.
EDF Jumps on Govt. Decision, Harbour Drops: EMEA Equity Movers
Faurecia SE cut its projected revenue and profitability for this year, as semiconductor shortages roil the auto industry by constraining production. Yet, the French part makers’ stock rallied as much as 6.7%, as investors welcomed clarity on the outlook. Valeo also advanced 8.4%, the biggest jump since early November.
Among other individual movers, Electricite de France SA shares rose the most since early July after the government said it won’t force the utility to sell more power to rivals at a regulated price. Universal Music Group dropped 3.7%, after Barclays initiated coverage of the stock with a recommendation of underweight.
Investor attention will soon turn to the earnings season, when European companies’ robust profit recovery will be put to test.
“The key driver for European equities will be positive earnings surprises, which are likely to come through in the third-quarter results season starting in a few weeks,” said Nick Nelson, head of global and European equity strategy at UBS Group AG.
While some strategists see further earnings upside for European equities, others warn the cycle of strong earnings growth that fueled the rally is coming to an end. “The earnings cycle is starting to cool,” as the positive comparisons from a year ago start to fade, Bank of America strategists, including Milla Savova and Sebastian Raedler, wrote in a note.
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