(Bloomberg) — European stocks retreated, erasing earlier advance, as investors considered risks to earnings and economic growth against the prospect of policy makers maintaining support for the recovery.
The Stoxx 600 Europe Index retreated 0.3% by 3:59 p.m. in London, with telecoms and utilities underperforming, while miners and technology led the gainers.
Stocks extended declines after the news that the Biden administration is said to be weighing a new investigation into Chinese subsidies and their damage to the U.S. economy as a way to pressure Beijing on trade. This could mean another phase of U.S.-China tensions, which can weigh on global growth sentiment.
The main European equities benchmark is on track for a second weekly loss, the first time that’s happened since the end of April, as investors reduced their risk allocations amid fears that central bank stimulus measures might get pulled back quickly. Markets participants are also closely watching inflation data, as prices paid to U.S. producers increased in August by more than forecast, adding to fears about rising costs eating into earnings growth.
“Global stock markets may be entering a period of turmoil,” said James Congdon, global co-head of Quest, a division of Canaccord Genuity. “The ECB and Federal Reserve are considering tapering their bond purchasing programs, inflation concerns continue, and we are beginning to see labor and inventory shortages forcing companies to lower their guidance.”
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Top Wall Street strategists came out this week with warnings about upcoming volatility in equity markets. Valuations are at historical extremes, stocks have rallied non-stop for seven months, the economy looks soft and the Federal Reserve is preparing to taper stimulus.
Still, many major asset managers remain optimistic about the prospects for equity returns. While the European Central Bank on Thursday said it will slow the pace of its pandemic bond-buying program, it reiterated that this shouldn’t be seen as tapering.
“We expect major central banks to remain supportive of growth, keeping rates lower for longer,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “This is positive for equity markets, particularly cyclical and value areas of the market.”
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At Morgan Stanley, the recommendation is also to re-engage with cyclical value stocks in Europe as cyclicals are expected to outperform into year-end. Strategists led by Graham Secker see consensus earnings-per-share growth estimates for European stocks of 7% for 2022 as too low.
“Doubts about the recovery are overdone, the economic growth will be strong in 2021 and 2022, and the ECB yesterday delivered on what was expected,” said Ignacio Cantos, investment director at ATL Capital in Madrid.
His firm has slightly reduced client exposure to European stocks to protect this year’s gains. Cantos said a small correction could happen in the short term, but he’s positive on the outlook through year-end.
Among individual mover highlights, ASML Holding NV gained 1.6% after Oddo raised its price target on the semiconductor equipment stock. Fresenius Medical Care AG dropped 4.4% as Barclays Plc and JPMorgan Chase & Co. cut their ratings, while Rubis SCA declined 7.4% following first-half results.
Luxury stocks rose as LVMH advanced after HSBC upgraded its rating of the French company.
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