European stocks bruised by worries on global economy

European shares fell yesterday, with concerns about the health of the economy in Germany and the United States prompting investors to lock in profits on top performers of recent months.

Data from the Institute for Supply Management pointed to an unexpected contraction in the US manufacturing sector last month, boding ill for demand for European goods.

The numbers followed a weak reading on a similar index in China, while closer to home, the International Monetary Fund halved its growth forecast for Germany.

The prospects of economic weakness dented expectations for a pick-up in earnings, seen as the most likely way to drive more gains in equities after a 12-month-long rally that was aided by central bank policy.

The FTSEurofirst 300 closed down 0.7 per cent at 1,207.65 points.

“It’s been quite volatile, and it’s been mostly the areas which have given you very good gains where you’ve seen a lot of profit-taking,” said Veronika Pechlaner, head of global equities at Ashburton.

Telecoms and healthcare, among the top performers in the past three months, led the fallers, with both sectors off more than one per cent.

Among individual stocks chip designer Arm was the biggest faller, off seven per cent after nearly doubling in value since the start of the year, as the launch of a new processor failed to quell concerns about the company’s lofty valuations.

Meanwhile miners, the clear laggards this year, were the only ones to edge higher, with investors finally seeing value in what is now one of the cheapest sectors in Europe.

Technical levels offered some support on the downside, but, with the EuroSTOXX 50 index of eurozone blue chips breaking below its May trough of 2,752, the charts left the door open for more weakness in coming sessions.

“The consolidation is now in progress and should head the EuroSTOXX towards 2,684 points, the 50 per cent retracement of the mid-April/mid-May upleg,” said David Furcajg, technical strategist at 3rd Wave Consult, who still sees the longer term trend as bullish.

From a fundamental viewpoint, analysts at JP Morgan also continued to see longer-term attraction in European stocks.

“We think the current market volatility should not turn into something more sinister and continue to advise that one should use dips as buying opportunities,” it said.

Although not as cheap as they once were following a year-long rally, European equities are still attractive relative to history, according to Thomson Reuters Datastream.