European Stock Bulls Retreat as Traders Bet on More Swings Ahead

(Bloomberg) -- The recent bout of optimism that lifted European equities to their highest levels since April faded, with the shares falling the most in a month as outflows from the region’s funds deepened.

The 1.1 percent decline in the Stoxx Europe 600 Index on Friday took its weekly slide to 1.4 percent. While the market has been the calmest in more than a year, investors are preparing for more turmoil ahead. Futures betting on volatility in the next three months trade at their highest levels since 2013 relative to the VStoxx Index.

The European stock rally has once again lost momentum, after U.S. services data indicated on Tuesday the weakest expansion in six years, while European Central Bank President Mario Draghi downplayed the need for more stimulus on Thursday. Worries about economic growth have dragged down the Stoxx 600 for the first week in three, and a Bank of America Corp. report showed fund managers withdrew money from the region’s equity funds for a 31st straight week -- a record streak of outflows.

“People were expecting the ECB to do more,” said Pierre Mouton, who helps oversee about $8.5 billion as a fund manager at Notz, Stucki & Cie. in Geneva. “After a strong rally in the past two months, we have more volatility going forward, with the Italian referendum and the U.S. election, so there are many things lingering that are making people nervous after the ECB meeting.”

The Stoxx 600 rebounded 14 percent from the June low that followed the U.K. secession vote through Monday. Since then, though, investors have started to question the rally amid intensifying speculation about the next Federal Reserve interest-rate increase, while euro-area economic data have began to miss forecasts again. Despite a rebound on Friday, the VStoxx tracking euro-area equity volatility is near its lowest level since August 2015, while its three-month futures trade about 32 percent higher, implying that investors are betting the current market calm won’t last.

Almost all western-European stock markets and industries fell on Friday. The U.K.’s FTSE 100 Index lost 1.2 percent, and France’s CAC 40 Index dropped 1.1 percent. Germany’s DAX Index, which earlier this week erased its annual drop, slipped 1 percent, turning negative again for the year. With a more than 1.4 percent slide, gauges of Portuguese and Irish shares were among the biggest decliners in the region.

Among stocks moving on corporate news, Greene King Plc sank 6.1 percent after the British pub owner said there could be tougher trading ahead. Burberry Group Plc slid 2.5 percent after a report that it cut prices in Hong Kong and China and as Goldman Sachs Group Inc. removed it from its list of shares to focus on.

Deutsche Bank AG advanced 4.1 percent after a report that it’s nearing an agreement with the U.S. Department of Justice to settle a probe into the sale of residential mortgage-backed securities. Rubis SCA rallied 7.7 percent after the French operator of oil and gas storage sites reported earnings that beat estimates. J D Wetherspoon Plc advanced 2.4 percent after the U.K. pub chain reported adjusted pretax earnings that beat estimates. 

To contact the reporter on this story: Camila Russo in Madrid at crusso15@bloomberg.net. To contact the editor responsible for this story: Cecile Vannucci at cvannucci1@bloomberg.net.