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European stock rally ends amid weak results, trade pessimism

Reuters 2019-01-10 15:56:05

LONDON (Reuters) - European shares tumbled on Thursday as optimism over U.S.-China trade talks faded and a slew of weak earnings reports hit auto and retailer stocks.

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, January 9, 2019. REUTERS/Staff

The trade-sensitive DAX .GDAXI was down 0.4 percent by 0950 GMT, while the pan-European STOXX 600 lost 0.3 percent and Britain's FTSE 100 .FTSE fell 0.2 percent.

The falls snapped a two-day rally that had taken European stocks to three-week highs.

China’s commerce ministry said trade talks made progress on “structural issues” such as forced technology transfers and intellectual property rights, but investors were not convinced.

“Overnight the Chinese Commerce Ministry said talks were ‘extensive ... deep ... detailed’, but other reports suggest the talks got bogged down when issues cut across Chinese national security and/or Chinese subsidies to state companies,” wrote Chris Bailey, European strategist at Raymond James.

Corporate results, which were poor across the board, offered scant comfort.

Autos .SXAP were the worst-performing sector, down 1.1 percent. Defensive real estate, utilities, and telecoms sectors gained as investors turned to stocks with high dividend payouts and stable earnings.

German lighting company Osram (OSRn.DE) fell 8 percent, the biggest drop on the STOXX, after its CEO warned the final quarter of 2018 was weaker than expected because auto demand had slowed.

Auto weakness also affected car parts makers Faurecia (EPED.PA) and Valeo (VLOF.PA), which lost 4.7 and 3.4 percent, and tyre maker Continental (CONG.DE), down 2.9 percent.

Continental and Faurecia were doubly hit when UBS downgraded both stocks, citing a slowdown in car sector growth.

Italian carmaker Fiat Chrysler (FCHA.MI) fell 1.3 percent after sources said it would pay more than $700 million to resolve lawsuits by the U.S. Justice Department over claims it used illegal software to tweak diesel-vehicle emissions.

Outside large caps, French consumer electronics retailer Fnac Darty (FNAC.PA) fell 4.4 percent. It warned “yellow vests” protests in France would hit its sales figures.

Scout24 (G24n.DE) lost 4.6 percent after DealReporter said the online listings firm’s talks over a potential buyout have stalled.

In the UK, updates from retailers dominated. Most confirmed they’d had a bad Christmas.

Cycling and car parts retailer Halfords sank 19 percent to the bottom of the FTSE 250 after a profit warning.

Kering (PRTP.PA), which owns Gucci, was cut to “neutral” from “buy” at UBS, driving the stock down 3.1 percent. Luxury stocks have suffered from mounting signs of slower growth in China.

A difficult few months for equities have driven stock valuations down to what some investors consider attractive, despite the risks.

“After a weeks-long roller coaster for global equities, valuations have de-rated in line with past bear markets, and sentiment has taken a hit,” wrote Goldman Sachs analysts.

“With equities already pricing a very negative outlook, we think this points to a risk rally — especially if global growth holds up as we expect.”

Some European stocks were boosted by broker notes: French real estate firm Icade (ICAD.PA) rose 3.6 percent after Kepler Cheuvreux upgraded it to “buy”, and Eutelsat (ETL.PA) climbed 3.9 percent after Morgan Stanley raised it to “overweight”.