European stocks dropped yesterday, with a broad benchmark hitting a three-week low, as uncertainty over the outlook for central banks’ stimulus policies prompted investors to book recent profits.
Data showing a faster-than-anticipated recovery in Britain’s job market fuelled speculation that the central bank’s record low interest rate of 0.5 per cent could be raised sooner than expected, sending London’s FTSE 100 down 1.4 per cent, underperforming other European indexes.
Also hitting sentiment, late on Tuesday Atlanta Fed President Dennis Lockhart said a cut in the Federal Reserve’s bond-buying operations remained a possibility at its December 17-18 meeting, earlier than most US primary dealers expect.
The FTSEurofirst 300 index of top European shares lost 0.6 per cent to 1,283.67 points, after hitting a three-week low earlier in the session. The eurozone’s blue-chip Euro STOXX 50 index fell 0.5 per cent to 3,021.17 points.
Stocks trimmed losses in late trade after a European Central Bank official was quoted as saying it could adopt negative interest rates or purchase assets from banks if needed to lift inflation.
ECB Executive Board member Peter Praet made the comments in aWall Street Journal interview.
The FTSEurofirst 300 is still up about 16 per cent since late June, a rally mostly fuelled by central banks’ massive liquidity injections as well as by improvements in European economic data.
But “the rally is losing steam,” said Jerome Troin-Lajous at equity sales at Louis Capital Markets in Paris. “The dispersion between stocks has been dropping lately which makes things more difficult for long/short fund managers to pick stocks, and overall a lot of investors have made good gains this year and don’t feel the need to chase the market higher.”
He added: “European stocks are not cheap any more, while... a number of firms have had profit warnings. Getting protection is not a bad idea now, like buying June 2014 puts.”
European stocks’ sharp, five-month rally has propelled valuation ratios to levels not seen since before the financial crisis started in 2007, with the broad STOXX Europe 600 index trading at 13.4 times 12-month forward expected earnings, above a 10-year average of 12.
Andreas Utermann, co-head and global CIO of Allianz Global Investors, which has €304 billion in assets under management, said that despite this week’s pullback, stocks should rally further in coming months.
“I think that central banks are set to continue to surprise capital markets on the dovish side, and risk assets will benefit most from this policy regime,” he said.
“It’s risky not to be exposed to risky assets, and any weakness in the market should be seen as a buying opportunity.”
Yesterday’s pullback was broad-based, with UK blue-chips such as Barclays, GlaxoSmithKline, and Rio Tinto losing 1.8 to 2.8 per cent.
European media stocks also featured among the biggest losers, with German broadcaster ProsiebenSat.1 falling four per cent after major shareholders placed 35 million shares at €31.53 apiece, at the bottom of a previously given range of €31.53 to €32.10.