European stocks received a boost yesterday as economic data from the eurozone indicated a recovery was taking hold, potentially providing an uplift to earnings into the year-end.
European shares enjoyed their best session since early August, rebounding 11.32 points, or 0.9 per cent to 1,219.03, following falls over the last three days.
The Stoxx 600 also rose one per cent, to 303.55, after data showed business activity across the eurozone picked up more quickly than expected in August.
“The burning question now is how long is the lag between improving macro fundamentals and an EPS upgrade cycle?” Robert Quinn, chief European equity strategist at S&P Capital IQ, said.
“Typically it is four months and accelerates when PMIs cross 52 (August was 51.7), and hence we stick to our previous timeline that the Q3 reporting season will see significant upgrades,” he said.
S&P has targets of 325 for the Stoxx 600 for the end of 2013, up seven per cent from current levels, and 375 for end-2014. It said the two-year earnings downgrade cycle is over and it assumes seven per cent and 10 per cent EPS growth for 2013-14.
China also released better data, pointing to stabilising growth and helping lift London-listed mining shares by 1.6 per cent as Chinese manufacturing activity hit a four-month high in August, according to a flash PMI. “If you want to understand whether there’s a positive or a negative outlook for equities, then PMIs are quite a good measure. We’ve seen a gradual improvement in PMIs since last July, and now we’re in growth territory,” James Butterfill, global equity strategist at Coutts, said.
Earnings from European companies appear to be improving.
Shares of Dutch retailer Ahold jumped 5.2 per cent after the company reported higher-than-expected operating profit for the second quarter.
Just 46 per cent of companies have so far missed earnings expectations in the second quarter compared with 48 per cent in the previous quarter, according to Thomson Reuters StarMine.
Builders’ merchant Wolseley was another strong gainer, rising 4.3 per cent after UBS upgraded its recommendation on the company, which has a strong US presence, to “buy” from “neutral” ahead of results due on October 1. “Analysis of US peers that have reported on Q2 suggests Wolseley’s growth should have accelerated to double-digit growth in (the quarter) to July,” UBS analysts said in a note.
The FTSEurofirst 300, however, remains three per cent off a five-year high hit in May, and volatility – a crude gauge of investor fear – could climb higher heading into September after the US Federal Reserve’s minutes on Wednesday offered little clarity over the timetable for a slowdown of its stimulus programme.