European shares recover after hefty falls

European shares rose today, recovering after the previous session's hefty falls on the prospect of diminished stimulus from the US Federal Reserve, but with traders braced for a choppy ride in the medium term.

The FTSEurofirst 300 was up 0.4 per cent at 1,148.24 by 0804 GMT, having slid 3.1 per cent yesterday, its biggest one-day fall in 19 months. The Fed said late on Wednesday that a stronger US economy meant it was likely to start scaling back its asset purchases later this year.

Central bank stimulus measures had helped push European markets to five-year highs in 2013 despite a shrinking domestic economy and falling earnings expectations, but the threat of withdrawal has knocked the index around 9 per cent since mid-May.

“The fear is ... setting in, with a lot of cutting of bullish positions. The most likely scenario is that rallies will be sold so I would be very careful buying the dip,” said Lex van Dam, hedge fund manager at Hampstead Capital, which manages around $500 million in assets.

Nick Xanders, head of European equity strategy at BTIG, highlighted that the Stoxx 600, up 0.3 per cent at 284.43, is trading dangerously near its key 284 support level, which cushioned the market in April and February. A breach could lead to further declines.

“I think we’re a very nervous market,” he said. “I don’t think we’re done (with the sell-off) ... I think we’ll definitely be volatile (in the medium term).”

Miners spearheaded the rise today, as investors seized the opportunity to buy into the sector on the cheap. A 0.7 per cent advance shaved its weekly drop to around 5 per cent.

The sector is trading at 9.9 times its 12-month forward price/earnings ratio, compared with the Stoxx 600 on 11.8 times, Thomson Reuters StarMine data showed.

The mining sector is set for a sharp rally in the near-term, benefiting from attractive valuations and a pick up in commodity prices and in economic activity in China, Societe Generale said, at the same time downgrading target prices for the longer run.

Reuters