European stocks bounce from March 2021 lows as dip buyers emerge

Inflation, hawkish central bank worries limit gains for European stocks.
Image: Bloomberg

European stocks edged higher from their lowest level in over a year as investors bought the dip after a global rout sparked by worries of aggressive central bank policy tightening amid stubbornly high inflation.

The Stoxx Europe 600 Index was up 0.3% at 8:59 a.m. in London after slumping Monday to its lowest since March 2021. Banks led the advance with rate-sensitive sectors outperforming following a dip in Treasury yields. Insurance and energy stocks also rose, while real estate declined.

The market is seeing “a dead cat bounce from short-term oversold levels, but concerns that central banks can’t engineer a soft landing means we likely haven’t seen the lows over the medium term,” said Neil Campling, head of tech, media and telecom research at Mirabaud Securities.

The European benchmark has been hammered this year as worries of hawkish central banks and a potential recession dented demand for risk assets, despite stock valuations falling well below their long-term averages.

After the European Central Bank last week outlined a slightly more aggressive path than economists had foreseen, focus this week is on the Federal Reserve’s policy meeting. Bets are climbing on the central bank considering its biggest interest-rate increase since 1994.

“Just two days ago I didn’t imagine for a second that we would be seriously talking about a 75 basis-points hike at this week’s Fed meeting, but in one session the market has got there and with the Fed in blackout they cannot pushback even if they want to,” said James Athey, investment director at abrdn. “Their quandary is that if they don’t do 75 basis-points tomorrow, they risk providing a dovish shock and making their job more difficult in the future.”

Investors believe hawkish central banks are the biggest risk for European stocks, followed by the global recession and then inflation, according to Bank of America Corp’s June fund manager survey for the region, in which respondents’ global growth expectations dropped to all-time lows.

For Louise Dudley, global equities portfolio manager at Federated Hermes, relative havens amid the inflation jitters include “names with stable dividend policies, value in healthcare, energy and also some of the consumer staples companies that are holding up given price elasticity for the strong brands, their ability to mitigate supply chain issues and strong current market conditions.”

Among individual movers, Atos SE sank as much as 27% after saying it’s considering a wide-ranging restructuring, alongside the exit of chief executive officer Rodolphe Belmer. Shares of Akzo Nobel headed for their longest streak of losses in three months after the company cut its second-quarter forecasts, partly due to lockdowns in China.

© 2022 Bloomberg

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