European stocks extended recent gains on expectations that inflation will continue to recede before investors become focused on earnings in the coming weeks, while the FTSE 100 neared a record high.
The Stoxx Europe 600 Index rose 0.5% by the close in London. Real estate and financial services shares outperformed while miners and energy stocks lagged behind. The UK’s FTSE 100 is one of the last European benchmarks to scale pre-Covid highs, closing just 0.2% away from a record high last seen in 2018.
Sika AG rose after Ineos, the chemicals company built by British billionaire Jim Ratcliffe, agreed to buy assets that Sika is selling to appease antitrust regulators. Temenos AG shares jumped as investors greeted the Swiss software company’s change of chief executive officer as positive.
European stocks have posted the best first two weeks of a year on record as easing inflation pressures, China’s reopening and aversion of an energy crisis thanks to mild weather supported appetite for equities. Already in a bull market, the Euro Stoxx 50 is also among the top 10 performing benchmarks globally in dollar terms so far this year, and its 14-day relative strength index has crossed into overbought levels.
Earnings will be a key catalyst moving forward as traders assess whether companies were able to navigate headwinds including higher interest rates with the European Central Bank’s battle against inflation now expected to end within half a year. Companies including Richemont and Burberry Group Plc report results this week.
“Markets could overshoot further in the short term as many strategies remain under-invested and could be pushed into the market accordingly,” said Ulrich Urbahn, head of multi-asset strategy and research at Berenberg. “In the medium term, we think that market participants will look less at inflation figures and more at growth figures again. In view of the threat of a US recession, volatility is likely to rise again in the course of the year.”
While European stock outperformance versus US peers is “now tactically quite stretched,” improving China sentiment, relatively cheaper valuations and low investor positioning in Europe should continue to provide support, Morgan Stanley strategists led by Graham Secker wrote in a note.
For more on equity markets:
- Europe’s Record New Year-Rally Can Keep Going: Taking Stock
- M&A Watch Europe: UBS, Credit Suisse, Sika, Renault, Temenos
- ‘Tunnel’ Looms For Post-Brexit Talks: The London Rush
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