European shares follow Asian stocks into negative territory

European shares fell on Monday, as a decline in the share prices of major mining stocks and in French supermarket operator Casino weighed on the region’s stock markets.

The pan-European FTSEurofirst 300 index and the euro zone’s blue-chip Euro STOXX 50 index were both down by 0.2 per cent.

Mining and steel stocks such as ArcelorMittal and Glencore fell as metals prices weakened and shares in Casino also declined after Standard & Poor’s cut its rating on the company.

A fall in oil prices also weighed on the shares of energy companies, while Dublin-founded Tullow Oil was further impacted by a downgrade from investment bank Jefferies. However, Bayer’s shares rose 2 per cent after people familiar with the matter told Reuters that Monsanto , the world’s largest seed producer, had approached Bayer to express interest in its crop science unit, including a potential acquisition worth more than $30 billion.

Nevertheless, some strategists remained cautious on the outlook for European stocks. JP Morgan Cazenove downgraded euro zone equities to “neutral” from “overweight”, citing headwinds on the region’s stock markets from a weakening in the US dollar.

“We reiterate our recent downgrade of Japan, and also downgrade Eurozone, from overweight to neutral. The region is still a crowded ‘long’, valuations are uninspiring, Euro is a headwind and ECB (European Central Bank) action is behind us,” said JP Morgan strategist Mislav Matejka.

The FTSEurofirst 300 index remains down by around 7 per cent since the start of 2016.

Most Asian stock markets slipped on Monday after three consecutive weeks of gains as a retreat in oil prices made investors cautious, but losses were tempered by hopes that China may soon cut interest rates again as pressure on the yuan eases. In line with a cautious Asian session, European shares were seen opening slightly lower.

The wobbles in the oil market, a general downturn in commodities and cooling growth in China have rattled financial markets in recent months. Fears about the outlook for global growth were also instrumental in the US Federal Reserve’s move last week indicating a slower path for future rate increases.

Asia-Pacific shares

MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.2 percent after entering positive territory for the first time this year on Friday. It is up 16 per cent from January's lows. Japanese markets were closed for a holiday. "Despite the current rally in risk, we are more inclined to be broadly bearish on emerging markets given the underlying weakening trend," said Frances Cheung, head of rates strategy, Asia ex-Japan at Societe Generale in Hong Kong.

Stocks in China and Hong Kong rose, but equity markets elsewhere in the region edged lower with Taiwan and Australia leading losses. In the absence of any fresh major economic data in a holiday-shortened week, investors were left to ponder the softer tightening bias from the Fed even as the US economic recovery appeared to be gathering fresh steam. Dollar bulls were hit hard last week after the Fed’s less hawkish stance which cut the projected rate hikes for the rest of the year by half to only two. Financial markets, as seen by money market futures, are barely pricing in one.

On a trailing price-to-earnings basis, the MSCI Asia ex-Japan is trading at 12.3 times, nearly one standard deviation below its 20-year average. At 9.3 times, Hong Kong’s stock market was trading comfortably below one standard deviation to its 20-year average.

China’s economy is showing signs of improvement while capital outflows from the country are moderating, top Chinese officials said on Sunday. Easing outflows and the softer dollar are resulting in less pressure on the yuan currency, which could give the central bank more confidence to cut interest rates and banks’ reserve requirements again after largely weak data in January and February, some market watchers say.

Reuters