European Stock Investors Finally Get a Friday to Smile About

(Bloomberg) -- It’s that Friday feeling. The mood is turning decidedly upbeat in the market, with glimmers of hope for two sagas that have plagued European stocks this year -- trade talks and Brexit.

As the week began, equities were coming off the worst slump since August, the trade war was heating up with the U.S. blacklisting Chinese tech giants, and U.K. Prime Minister Boris Johnson had deemed a Brexit agreement by the end of the month “essentially impossible.” Fast forward to Friday, and equities are poised for their biggest weekly rally since mid-March.

The Stoxx Europe 600 Index traded 1.9% higher as of 4:02 p.m. CET, the biggest gain since January. Despite the rout at the start of October, the gauge is now less than 1% away from a one-year high reached last month. The coming days will confirm whether investors’ optimism is warranted, and provide catalysts for further stock market moves.

“The slightest glimmer of hope literally gives the stock market wings and all worries and crises seem to have been forgotten,” Andreas Lipkow, strategist at Comdirect Bank, said by phone. “It remains to be seen if the very high expectations can be met. As after any big party, the headache on the following morning can be equally painful.”

The gains were even more pronounced for U.K.-domestic stocks, boosted by hopes the U.K. may reach a deal with the EU on Brexit. The pound has been surging since Irish Premier Leo Varadkar said Thursday that he believed an agreement is possible by the Oct. 31 deadline, following two-and-a-half hours of “constructive” talks with Prime Minister Boris Johnson. On Friday, EU Chief Negotiator Michel Barnier recommended that detailed talks can begin in earnest.

The FTSE 250 was up 3% on Friday, the most since July 2016, with Royal Bank of Scotland Group Plc jumping 16% and Marks & Spencer Group Plc climbing 11%. The FTSE 100, home of multinationals such as BP Plc and GlaxoSmithKine Plc, was only up 0.5%, hurt by the rally in the pound.

“What we see today is mostly short-covering in cyclical sectors and financials,” said Markus Steinbeis, managing director at asset manager Steinbeis & Haecker in Munich, adding that the rally could last for a little while, given the attractive valuations and the significant underweight in these value stocks ​​among investors.

The September fund manager survey from Bank of America showed the U.K. has been the least-favored region by investors in terms of equity allocation globally. The poll showed that overall, a net 30% of fund managers said they were underweight U.K. stocks, 1.2 standard deviations below the long-term average.

On the trade war front, the second day of U.S.-China negotiations kick off on Friday after U.S. President Donald Trump said the first day had gone “very well.” It’s the first senior-level in-person talks since late July to attempt to end an 18-month standoff. Trade-sensitive sectors including autos and miners were surging, with Volkswagen AG up 3.5%, Daimler AG up 2.5%, and ArcelorMittal up 4.8%.

Uwe Becker, co-CIO of Shareholder Value Management, remained skeptical about the overall market rally, however. “The reason for this upward move is lacking the facts. We haven’t heard any details on trade talks or Brexit besides the comments that talks are ‘going well,’ hence the move lacks substance to me.”

To contact the reporters on this story: Namitha Jagadeesh in London at njagadeesh@bloomberg.net;Jan-Patrick Barnert in Frankfurt at jbarnert3@bloomberg.net

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

©2019 Bloomberg L.P.