What market rout? Just days after global growth concerns roiled European equities, rays of hope for two long-drawn sagas – Brexit and trade talks – sent European equities soaring going into the weekend.
While the rally has pushed the Stoxx Europe 600 Index to less than 1% away from a one-year high reached last month, developments over the next few days will be key to finding out if the optimism is warranted.
“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.” Domestic UK stocks surged with the pound as the European Union and the UK neared detailed exit talks after Prime Minister Boris Johnson and his Irish counterpart Leo Varadkar said they see a pathway to a potential agreement.
With the particulars of what has changed as yet unclear, investors will be watching next week’s EU summit closely ahead of the October 31 Brexit deadline.
“The reason for this upward move is lacking the facts,” said Uwe Becker, co-CIO of Shareholder Value Management. “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.”
The FTSE 250 on Friday capped its biggest one-day advance since May 2010, with Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc jumping more than 10%. The exporter-heavy FTSE 100 Index posted smaller gains, hurt by the rally in the pound.
Meanwhile, the rally in European stocks was also helped by easing trade worries as US and China entered a second day of negotiations and US President Donald Trump said the first day had gone “really well.” Miners and banks, among the worst performers this year, posted gains of nearly 5% on the day.
“What we see today is mostly short-covering in cyclical sectors and financials,” Markus Steinbeis, managing director at asset manager Steinbeis & Haecker in Munich, said. The rally could last for a little while, he said, given the attractive valuations and the significant underweight in these value stocks among investors.
In a week that began with investors coming off the worst slump since August, the US blacklisting Chinese tech giants, and the UK premier deeming a Brexit agreement by the end of the month “essentially impossible,” stocks made a remarkable recovery toward the end.
All western-European benchmarks rallied on Friday, with Germany’s DAX Index turning higher for the month and Ireland’s ISEQ Index surging the most since just days before the Brexit referendum of 2016.
The strength of the market moves also lends credence to the theory that investors were not sufficiently positioned for positive breakthroughs. A net 30% of fund managers in the latest Bank of America Merrill Lynch survey said they were underweight UK stocks – the least favoured region globally – while European equity funds bled money in 80 of the past 83 weeks.
“It seems that a general underweight in equities has led to a certain short squeeze,” said Marc Decker, head asset management at Merck Finck. “Hence some investors were caught on the wrong foot. For the time being we have a strong momentum for stocks, but this can be strained at any time by political tensions.”
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