European shares fell to six-week lows yesterday, breaking below technical support levels in the face of weak earnings and concerns that another trimming of US monetary stimulus may exacerbate the emerging markets rout.
Emerging economies – key revenue sources for Europe’s car makers, fund managers and other companies – have been hit by financial market turbulence in recent days, triggered by regional problems and by the prospect of another $10 billion cut in the US Federal Reserve’s bond purchases.
Analysts say the Fed’s decision after a monetary policy meeting could expose the weakness in some emerging countries’ finances as foreign cash moves out and local borrowing costs rise.
That, in turn, would eat into the revenues of global companies exposed to emerging markets to the detriment of indexes such as the EuroSTOXX 50, whose constituents make around a third of their sales in emerging markets.
“If the Fed takes another $10 billion out of QE ... (EM currencies) will probably end up weakening further,” Nick Xanders, who heads up European equity strategy at BTIG, said.
“For the last three years, investors have thought that they’ve put the glass slipper on Cinderella, but actually, when the QE is taken away, you realise it’s the ugly stepsister.”
The EuroSTOXX 50 closed down 0.9 per cent at 3,011.45 points , its lowest finish since mid-December.
We have to accept that we are still in a correction
The move took the index below a key technical support of the 100-day moving average, last at 3,014.08 points, which had acted as a floor for the market earlier this week.
Among the top regional fallers, the German DAX fell 0.8 per cent, slipping below its 50-day moving average. “Technically, at least in the DAX, we are through support at 9,350, so we have to accept that we are still in a correction... and the reason might be some further worrying about the possible Fed decision and the emerging markets too,” said Oliver Roth, head trader at Close Brothers Seydler.
Underscoring the emerging market risks for European companies, Fiat said results were hit by a slowdown in Latin America. Shares in the carmaker, which also cut its 2014 trading profit forecast, dropped 4.1 per cent, among the top fallers on the broad FTSEurofirst 300.
Among the other losers, Norwegian aluminium producer Norsk Hydro fell 4.3 per cent after forecasting higher costs, while Swedish hygiene and paper products maker SCA shed five per cent after performance in two key divisions missed expectations.
One bright spot came from miners, with Antofagasta and Anglo American beating production forecasts, sending their shares up 6.1 and 5.7 per cent, respectively.
Analysts, however, questioned whether this trend would benefit the sector in the medium term. “There’s a huge supply glut on its way in the mining sector, so you’re going to see the words ‘record’ and ‘production’ come out of those companies for some time,” said Robert Quinn, chief European equity strategist at S&P Capital IQ.