European Stocks Rallied on Optimistic Speculation despite Grim Fundamental Outlook
European markets continued to climb higher as investors believed the recession is starting to bottom out regardless of contrary indications from the US car industry, uncontrollable spread of swine flu through international borders and poor economic readings throughout the Euro region.
Europe Session Key Developments
• Chrysler Forced to Enter Bankruptcy by Obama Administration
• World Health Organization Raises Swine Flu Health Alert to Level 5
• Rising Unemployment Threatens Consumer Confidence and Spending
European markets continued to climb higher as investors believed the recession is starting to bottom out regardless of contrary indications from the US car industry, uncontrollable spread of swine flu through international borders and poor economic readings throughout the Euro region. Typically, rallies driven by sheer optimistic speculation does not last long as investors will begin to realize the artificial balloon in prices compared to the actual fundamentals driving the markets. By taking a look at today’s markets, we can see that similar situation setting up as a list of events point to a bearish sentiment. To begin, US carmaker Chrysler LLC has reached the deadline set by US President Obama to cut costs and reorganize the company into a viable candidate to merge with Fiat Spa in order to receive government funds. Unable to meet the requirements, Chrysler will file for Chapter 11 Bankruptcy and be re-organized with guidance from the Obama administration. Adding to the dour outlook, the World Health Organization has raised the swine flu health alert to level 5, one level before declaring the influenza a pandemic. With no indication of the swine flu outbreak slowing down, global economic recovery will be significantly hampered by reduced tourism. Looking at the economic docket, job reductions continue to rise at greater-than-expected rates. Unemployment throughout the Euro-Zone rose to 8.9% while economists expected an 8.7% level. Without a sense of job security and any disposable income, we may not see a rebound in consumer confidence and spending anytime soon.
FTSE 100 4,243.71 +54.12 +1.29%
Equity markets in the UK rallied with the least gains as Financials, Technology, and Basic Materials leading the index with 4.83%, 3.51% and 2.99%, respectively. Royal Bank of Scotland was the top mover for the index with a 13.59% gain. Legal & General, UK’s third largest insurer was also a top winner with a 12.98% rally. Kazakhmys helped boost the Basic Materials sector with a 4.7% gain as the copper producer announced an increase in first-quarter output in finished metal.
CAC 40 3,159.85 +42.91 +1.38%
France’s leading index rose for the day with only Oil & Gas and Basic Materials closing in the red. Financials and Technology helped lead the index higher with gains over 2%. The top gainer that also led the Financials higher was Axa, Europe’s second-biggest insurer as their CEO Henri de Castries announced his intentions to not raise capital through selling new shares of the company. Renault was also a big winner in the index as the carmaker rose 9.66% on speculation that the US auto-market was set to improve.
DAX 4,769.45 +64.89 +1.38%
German equities closed with the same gains as the CAC while the index also had only two losing sectors, Consumer Goods and Technology. Financials and Basic Materials led the index higher with both sectors closing above 3%. BASF, world’s biggest chemical producer rallied 7.37% as the company released profit earnings of €375 million, beating €124 million forecasted by analysts. Munich RE, world’s second largest reinsurer was also a big winner with 6.52% gains.
IBEX 35 9,038.00 +146.70 +1.65%
Spain’s stock market saw the most gains of the five major as the index closed with only Telecommunications in the red. Telefonica, Europe’s second-largest phone company fell 1.37% as the company competes with Vodafone Group in an effort to acquire the German broadband unit Hansenet. The top two winners in the index were Banco Santander and Gamesa Corporacion Tecnologica with 4.45% and 4.12% gains, respectively.
S&P/MIB 19,177.00 +273.00 +1.44%
Italy’s leading index climbed higher with Financials, Oil & Gas and Utilities leading the advance. Consumer Goods sector weighed down the gains in the index with a 3.22% decline. Fiat was one of the index’s largest losers with a 5.94% after Chrysler was announced to have entered into bankruptcy. A top winner in the index was Intesa Sanpaolo, Italy’s second biggest bank as Deutsche Bank raised the price estimate for the stock to 2.5 euros.