After 11 Days Without Gains, European Stocks Hit Oversold Level

(Bloomberg) -- European stocks have fallen so much that they reached a technical level signaling a rebound may be around the corner.

The Stoxx Europe 600 Index slid 0.8 percent, marking an 11th consecutive day without gains for the first time since 1994. This week was particularly brutal, with concerns about the outcome of the U.S. presidential election sending the gauge to its worst plunge since the February rout.

But the losses might just have gone too far: The Stoxx 600’s relative strength index hit a level that analysts call oversold, indicating that investors could have bailed on shares too eagerly. At the same time, European equity funds finally snapped a record 38-week run of outflows, according to a Bank of America Corp. report citing EPFR Global data.

After 11 Days Without Gains, European Stocks Hit Oversold Level

“There is a risk-off sentiment in the equity market since we’ve seen the polls tightening between Clinton and Trump,” Pierre Martin, a trader at Saxo Bank A/S, said by phone from London. “The fact that we’ve broken into oversold territory shows that. Investors in Europe are expecting a bit more clarity, a bit more confidence from the U.S. In the short-term, a Clinton win may bring some relief.”

The 3.5 percent slump this week has sent the Stoxx 600 to a four-month low. Its valuation of 14 times estimated earnings is near the lowest relative to global equities since August. On Friday, all its industry groups declined. No western-European market was spared, and the U.K.’s FTSE 100 Index posted the biggest drop among major gauges amid a strengthening of the pound. Its 4.3 percent weekly slump was its worst since January.

Anxiety over polls showing Hillary Clinton’s lead over Donald Trump has narrowed added to concerns over the strength of Europe’s economic recovery and the willingness of central banks to keep policy accommodative. A measure of euro-area stock volatility rose for a 10th straight day, its longest run since 2011. 

But with the equity slump, the Stoxx 600’s RSI has fallen to about 29, below the oversold level of 30. The last time it dropped lower than that limit was before the Brexit vote in June, and it subsequently rebounded 9.4 percent through a four month-high in September.

To EFG Asset Management’s head of research, Daniel Murray, in an environment where investor sentiment is dominated by political events, a Clinton victory next week would bring a relief rally, at least in the short term.

“The economic data and the earnings season have been reasonable, but there are a lot of political crosswinds dampening sentiment,” Murray said from London. “Clinton may not be universally liked, but she does at least have senior administration experience and would be viewed as a safer and more predictable helmsman.”

With the reporting season in full swing, about 62 percent of Stoxx 600 companies have beaten profit projections, while 48 percent topped sales estimates, data compiled by Bloomberg show. Analysts forecast a 4.3 percent contraction in net income this year.

Among stocks moving on corporate news today: 

  • Erste Group Bank AG plunged 7 percent after Austria’s biggest bank forecast lower profitability next year. 
  • Commerzbank AG fell 1.4 percent after the German lender swung to a loss in the third quarter amid its biggest overhaul since the global financial crisis.
  • Hikma Pharmaceuticals Plc tumbled 6.8 percent, leading health-care stocks lower, as people familiar with the matter said U.S. prosecutors are bearing down on generic pharmaceutical companies in a criminal investigation into suspected price collusion.
  • Cie. Financiere Richemont SA jumped 5.2 percent after the maker of Piaget jewelry unveiled a sweeping overhaul of top management and its board as it reported a plunge in sales.
  • LafargeHolcim Ltd. climbed 1.2 percent after the world’s largest cement maker raised a 2016 target for savings and said an improvement in prices during the third quarter could continue through the last part of the year.
  • L’Oreal SA advanced 2.2 percent after the world’s largest cosmetics maker posted sales that beat estimates on rising demand for high-end brands in North America.