European stocks rebound after worst week in two years

Deutsche Welle
5 Min Read

Europe’s main stock markets recovered at the start of trading on Monday following tentative rebounds in Asia. However, analysts believe volatility will remain high amid fears of rising inflation in the United States.In the eurozone, Frankfurt’s DAX 30 rallied 1.1 percent to 12,238 points and the Paris CAC 40 advanced 1.0 percent to 5,130 in early trading on Monday after last week’s turbulence — their worst weekly performances since 2016.

Last week, the Stoxx Europe 600 index tumbled 5 percent, or around €1 trillion ($1.22 trillion) in market cap, as shares across Europe couldn’t escape a major sell-off in US equities that saw US stocks fall 7.2 percent — the worst weekly fall since the depths of the eurozone crisis in 2011.

Read more: Turmoil continues on US, Asian exchanges

David Kostin, chief US equities strategist at investment bank Goldman Sachs claimed, however, that “no single catalyst sparked the decline.” In a note to investors, he said that fears of higher US inflation and rising bond yields may have started the equities rout, but that it was exacerbated by technical factors, such as algorithmic trading and the collapse of funds betting on falls in volatility. “Most equity market corrections recover without developing into bear markets or presaging recessions,” he added.

Read more: The Dow flash crash: of machines and men

Volatility set to remain high

The gains in European stocks came after a rally on Wall Street on Friday, which saw US shares rebound, with the Dow Jones up 1.38 percent and the S&P 500 index gaining about 1.5 percent.

But volatility appears set to remain high compared to recent months. The market’s main gauge of volatility, Chicago-based CBOE’s Volatility Index, fell 4.4 points to 29.06 on Friday but was still nearly three times the average level of the past year.

Therefore, Brian Culpepper at James Investment Research, expects that profit-taking will lead to further losses, warning that stocks are still “extremely expensive.”

Read more: Central bankers seek to soothe nerves after market turmoil

His view is echoed by Stephen Innes, head of Asia-Pacific trading at OANDA. “With powerful US economic signals and interest rates most certainly to rise quicker than expected, last week’s tumult could be little more than the start of the equity rollercoaster.” Innes added that this week’s US inflation data would be “a monster of a print.”

Asian markets wobbly

Against this background, Asian markets struggled to hold early gains on Monday. Trading there got off to a calm start but while some managed to stay in positive territory, the afternoon saw gains eroded or wiped out.

Hong Kong, which sank more than nine percent last week, was up 0.7 percent in the afternoon before a late sell-off saw it close 0.2 percent lower, though Shanghai closed up 0.8 percent and Singapore rose 0.1 percent.

Seoul gained 0.9 percent, with traders cheered by signs of a thaw in relations between North and South Korea during the Winter Olympics. Taipei added 0.5 percent and Bangkok 0.3 percent, but Sydney eased 0.3 percent and Manila dipped 0.5 percent. Tokyo was closed for a public holiday.

After a stellar 2017 and a January that saw record and multi-year highs around the world, traders are scurrying to the hills this month as a strong economic outlook, particularly in the US, healthy corporate earnings and rising inflation have sent borrowing costs surging. Equity markets, for years buoyed by post-crisis stimulus, have spiraled into the red as traders fret that the era of cheap cash is at an end.

uhe/aos (Reuters, dpa, AFP)

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