European Stocks Advance as Cyclicals Jump on Growth Optimism

(Bloomberg) -- European equities reversed earlier losses to advance on optimism an economic recovery is picking up, fueling gains in cyclical sectors.

The Stoxx Europe 600 Index rose 0.4% by the close in London, erasing a drop of as much as 0.6%. Cyclicals such as carmakers and lenders led gains, with Italian and Spanish banks outperforming. Defensives, such as healthcare and technology, declined.

European stocks fell earlier as coronavirus cases surpassed 10 million globally and as an increase in the U.S. continues to batter states like Texas, Arizona and Florida. They rose with American peers in afternoon trading after contract signings to purchase previously owned U.S. homes surged in May by the most on record, beating all forecasts. This made investors optimistic that an economic recovery is on its way, fueling a rotation into more economically sensitive sectors.

“We expect a volatile summer, with limited downside as positioning and sentiment remain cautious,” said Ulrich Urbahn, head of multi-asset strategy and research at Joh Berenberg Goss. “Until year-end we remain constructive.”

The unexpected improvement in economic data partly resulted from some states beginning to ease restrictions from coronavirus lockdowns.

BlackRock Investment Institute strategists raised European equities to overweight, saying the region is exposed to cyclical upside as the economy restarts against a backdrop of “solid” public health measures and policy responses. They cut U.S. equities to neutral after a stretch of outperformance.

Italian lenders including Banco BPM SpA and UniCredit SpA climbed more than 4%. Italy’s Asset Management Company, or Amco, agreed to buy a bad loan portfolio from Banca Popolare di Bari for about 500 million euros ($562 million), according to an emailed statement.

“Europe’s exposure to financials and cyclically sensitive sectors -- such as industrials, materials and energy -- gives it the potential to outperform in the second phase of the recovery, when economic activity picks up and yield curves steepen,” said Andrew Pease, global head of investment strategy at Russell Investments.

©2020 Bloomberg L.P.