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Banking

European stock market rebound likely temporary

Strategists say financial and oil stocks are driving only a temporary recovery and that politicians are fudging a longer-term solution

 

Rising financial and oil stock prices, which are pushing up European equity markets, is a short-term movement that does not have major importance in the longer term, strategists tell Euromoney. Rather than providing confidence that equity markets are retracing losses, strategists say the positive trajectory in stock price movements still fall below February highs and any gains in oil stocks are due to news of Libya’s Gaddafi regime collapsing.

“In the wake of Angela Merkel’s stubborn and ill-considered remarks about not being held to ransom by markets, which she believes wants an EU debt union rather than a stability union, equity markets rallied – but it would be folly to think that it is anything more than a bear-squeeze rally,” says David Buik, partner at BGC Partners. “Today’s sharp rally from what was originally estimated to be a negative opening was given added momentum from the hope of a settlement in Libya.”

European stock markets saw a rise on Monday, which is a sharp contrast to the tumble in prices on Friday August 19. UK’s FTSE100 moved to over 5100, after dramatically falling to under the 5000 mark on Friday. France’s CAC-40 reached over 3060 and the DAX followed suit, reaching over 5500.

Oil stocks led the rally with the current political situation pushing gains across European equity markets as heavy fighting takes place in Tripoli, around the compound of the country’s leader Colonel Muammar Gaddafi.

Financial stocks also gave some upward momentum to European equity markets, however, strategists warn that today’s rally will be short-lived.

“Banks have lost between 40% and 50% of their value since the high in February. With their overall exposure to sovereign debt, capital bases have been dangerously eroded, thanks to moribund behaviour from its politicians,” says Buik. “Today’s limp rally is but a mere bagatelle. The key to the economy’s recovery is through banks. Their inability to lend will savage growth. Are you hearing us, you politicians? Perhaps on Friday the meeting of the world’s central bankers will deliver to us QE3 like John the Baptist’s head on a charger. That would temporarily alleviate the problem, but it still remains a carbuncle on financial society.”

While strategists say that equities are oversold, it will be a range of data releases later this week that will determine if the small positive rises in the equity markets are sustainable. Federal Reserve chairman Ben Bernanke is due to give a speech at the Jackson Hole economic symposium in Wyoming on Friday August 26. Market participants are guessing what he will say after used the meeting last year to launch the second round of quantitative easing.

“The key question is how sustainable are these gains and can momentum start to build and strengthen?” says Raymond. “Unfortunately recent bounces have been very choppy in nature and this makes them fragile, as proved by last week’s selling. The lack of economic data today is most likely helping to strengthen some short-term stock demand but as we head deeper into the week, we have GDP readings from the UK and US on Friday along with the Jackson Hole meeting, and it is these three headlines that will likely determine the longevity of today’s bullish move.”

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