European shares hit five-week highs yesterday and broke above technical resistance to pave the way for further gains after the US Federal Reserve allayed market concerns of an imminent start to its stimulus withdrawal.
Growth-sensitive stocks like miners took comfort from Fed chairman Ben Bernanke’s pronouncement on Wednesday that a highly accommodative policy was needed for the “foreseeable future”.
The FTSEurofirst provisionally closed up 0.6 per cent at 1,196.86 points, moving firmly above its 100-day moving average as gold miners like Fresnillo and Randgold rallied in tandem with metal prices.
Although many still expect the US central bank to begin trimming bond purchases as soon as September, Bernanke affirmed that it will only consider such a move if the economy picks up.
“They’re trying to remind the market that tapering is data-dependent – they’re not going to remove it unless the economy improves.
“So you want the Fed to taper,” said Andrew Goldberg, global market strategist at JPMorgan Asset Management.
In a further upbeat technical signal, the EuroSTOXX 50 gained 0.8 per cent to 2,681.32 points, closing a bearish gap opened in early June, when the Fed first officially raised the possibility of reduced stimulus.
“What the Fed is trying to do is bring forward as much of that volatility as possible now, by talking about it and getting the market focused on it ... They don’t want to swing it out of the blue and suddenly shock the market,” said Derry Pickford, macro strategist at investment management firm Ashburton.
“There absolutely was an over-reaction (in June) ... I think the markets are completely positioned for that tapering now.”
Underscoring the shift in the market’s attitude, European equities trimmed some of their gains in afternoon trade after news of a pick-up in US weekly jobless claims.
JPMorgan Asset Management recommended investors focus on cyclical sectors that will benefit if the economy improves.
Societe Generale suggested positioning for an autumn pick-up in implied volatility and forecast European stocks, especially large caps, would outperform US peers.
“Fed tapering will cause US yields to rise faster than those of the euro zone, which should strengthen the dollar,” SocGen’s analysts wrote in a note.
“This will benefit euro zone stocks in general but will be of particular benefit to companies with large exposure to the US or dollar.”
But euro zone political jitters could still cast a cloud over the region’s stock market prospects. Portugal’s blue-chip index fell two per cent yesterday after the President rejected a plan to heal a government rift, raising the prospect of early elections as the country tries to exit its EU bailout.(Reuters)