Sun, Nov 06, 2016 - Page 14 News List

European stocks hit oversold level

Bloomberg

European stocks have fallen so much that they reached a technical level signaling a rebound might be around the corner.

The STOXX Europe 600 Index slid 0.8 percent, marking an 11th consecutive day without gains for the first time since 1994.

This week was particularly brutal, with concerns about the outcome of the US presidential election sending the gauge to its worst plunge since the February rout.

However, the losses might just have gone too far: The STOXX 600’s relative strength index (RSI) hit a level that analysts call oversold, indicating that investors could have bailed on shares too eagerly.

At the same time, European equity funds finally snapped a record 38-week run of outflows, according to a Bank of America Corp report citing EPFR Global data.

“There is a risk-off sentiment in the equity market since we’ve seen the polls tightening between [Democratic US presidential candidate Hillary Rodham] Clinton and [Republican US presidential candidate Donald] Trump,” Saxo Bank A/S trader Pierre Martin said by telephone from London. “The fact that we’ve broken into oversold territory shows that investors in Europe are expecting a bit more clarity, a bit more confidence from the US. In the short-term, a Clinton win may bring some relief.”

The 3.5 percent slump this week has sent the STOXX 600 to a four-month low.

Its valuation of 14 times estimated earnings is near the lowest relative to global equities since August.

On Friday, all its industry groups declined. No Western European market was spared, and the UK’s FTSE 100 Index posted the biggest drop among major gauges amid a strengthening of the pound. Its 4.3 percent weekly slump was its worst since January.

Anxiety over polls showing Clinton’s lead over Trump has narrowed added to concerns over the strength of Europe’s economic recovery and the willingness of central banks to keep policy accommodative. A measure of euro-area stock volatility rose for a 10th straight day, its longest run since 2011.

However, with the equity slump, the STOXX 600’s RSI has fallen to about 29, below the oversold level of 30. The last time it dropped lower than that limit was before the Brexit vote in June, and it subsequently rebounded 9.4 percent through a four-month high in September.

In an environment where investor sentiment is dominated by political events, a Clinton victory next week would bring a relief rally, at least in the short term, EFG Asset Management’s head of research Daniel Murray said.

“The economic data and the earnings season have been reasonable, but there are a lot of political crosswinds dampening sentiment,” Murray said from London. “Clinton may not be universally liked, but she does at least have senior administration experience, and would be viewed as a safer and more predictable helmsman.”

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