European Stocks Rebound From Worst Drop Since May With Cyclicals

(Bloomberg) -- European stocks advanced, rebounding from their biggest drop in almost two months, as investors mulled the outlook for recovery and returned to sectors that are more sensitive to the economic revival.

The Stoxx Europe 600 Index rose 1.3% by the close in London, retracing most of Thursday’s declines. It’s now just 0.5% away from a record high reached last month. Cyclicals such as miners, automakers and banks -- the main victims of the Thursday retreat -- led gains, while France’s CAC 40 outperformed, as it jumped 2.1%.

Investors returned to risk assets today as they factor in the threat that the rapidly spreading delta virus strain poses to the economic recovery, while watching signals from central banks on the timing of stimulus tapering. The Stoxx 600 is bouncing off the 50-day moving average it tested on Thursday, after trading in a range near a record for the past month.

“Markets had priced in all the positives too quickly so it’s normal that we see some profit taking as some doubts arise around the strength of the economic growth and what central banks will do,” said Angel Olea, chief investment officer at Abante Asesores in Madrid. “Next step will be earnings season, that should show very strong dynamics.”

Thursday’s market selloff was led by a rotation out of more economically sensitive sectors amid concerns about the growth recovery and higher inflation. Goldman Sachs Group Inc. strategists today said they expect a 45% earnings-per-share increase for Stoxx 600 companies this year.

“Market narrative has quickly shifted from goldilocks to growth scare. Amid poor summer liquidity, activity data peaking, rising Covid cases, supply bottlenecks and Fed closer to tapering, erratic price action could continue,” said Emmanuel Cau, a strategist at Barclays Plc. “Hedging thus remains warranted, but the sharp reversal in reflation trades looks overdone to us.”

The U.K.’s economic recovery lost momentum in May despite a relaxation of lockdown curbs. Still, the FTSE 100 rose Friday, lifted by commodity shares.

Investors have been piling into European funds in the second quarter, with Sanford C. Bernstein strategists led by Mark Diver noting that equity funds had new inflows of $16 billion, making it the best quarter for inflows in four years. “Europe should attract more inflows from here, given the scope for a further reversal of the $230 billion outflow from the region which has occurred over the last 3 years,” they said in a note.

Among individual moves, Vectura Group Plc jumped 14% after Philip Morris International Inc. agreed to buy the U.K. maker of inhaled medical therapies for 1.05 billion pounds ($1.5 billion).

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