European shares rose yesterday, extending their three-week rally to fresh multi-year highs, and Deutsche Telekom surged after forecast-beating earnings.
The German telecom operator was the best performing blue chip, rising 4.7 per cent to a seven-month high, while Spanish rival Telefonica fell 0.9 per cent after missing analyst forecasts.
The FTSEurofirst 300 index of top European shares finished 0.7 per cent higher at 1,229.43 points, its highest closing level since mid-2008, while the euro zone’s blue chip Euro STOXX 50 index added 0.6 per cent at 2,784.62, a near two-year closing high.
The two indexes have risen about seven and nine per cent respectively over the past three weeks on the back of strong support from central banks, and technical momentum indicators such as the relative strength index (RSI) show that stocks are now ‘overbought’ and ripe for a pull back.
“The market is on life support from the central banks. The level of complacency in the market is very high at the moment and we could get a correction any time,” FXCM analyst Nicolas Cheron said.
“It’s time to take profits on a number of stocks that have performed well lately, and to hedge the portfolios.”
The put/call ratio on the Euro STOXX 50, which is used to gauge investor sentiment, has been rising in the past days, a sign that investors have started to add protection to their equity holdings in case of a pull back.
“Stock valuation ratios have been rising while fundamentals continue to deteriorate. This is due to the strong flow of liquidity and the appetite for yields, but we’re not in a bubble,” Cholet Dupont strategist Vincent Guenzi said.
“In Europe, the low level of bond yields would justify higher valuation ratios for stocks, and also the fact that sovereign risks have dropped.”
The broad STOXX Europe 600 trades at 12.5 times expected earnings in the next 12 months, while Wall Street’s S&P 500 trades at 13.8 times expected earnings, according to Thomson Reuters Datastream.
Around Europe, UK’s FTSE 100 index added 0.4 per cent, Germany’s DAX index rose 0.8 per cent, and France’s CAC 40 gained 0.9 per cent.
Equities were also underpinned yesterday by data showing an unexpected rise in German industrial output in March, fuelling speculation that Europe’s biggest economy was recovering after a disappointing end to 2012.