Europe outlook cut weighs on shares, oil prices extend fall

[November 04, 2014]  By Lionel Laurent

LONDON (Reuters) - European shares were mixed and core bonds outperformed on Tuesday after the European Commission cut its growth forecasts, offsetting a positive string of company earnings as oil prices extended their fall.

The Commission's new outlook indicated the euro zone would need another year to reach even a modest level of growth.

Meanwhile, U.S. equity futures <SPc1> were down 0.1 percent on election day, as Republicans were poised to make major gains and possibly recapture control of the U.S. Senate in a midterm vote that could serve as a public referendum on President Barack Obama's job performance.

Experts expect to see a focus on key environmental and energy issues after the midterms that could affect markets, such as a potential jump-start to energy-friendly policies that could shore up oil-and-gas companies.

The U.S. economy is leading a broader global revival that is nonetheless being held back by the euro zone's faltering recovery from its financial crisis. This is becoming a wider concern as the currency bloc generates a fifth of global economic output.
 

The pan-European FTSEurofirst 300 index <.FTEU3> was up 0.1 percent at 1112 GMT, paring early gains after Spain's Banco Santander <SAN.MC> reported a jump in third-quarter net profit and German luxury carmaker BMW AG <BMWG.DE> said its third-quarter operating profit came in ahead of expectations.

Shares of closely watched U.S.-listed Chinese e-retailer Alibaba <BABA.N> were up in pre-market trading on the back of in-line quarterly earnings.

"There is still nervousness in the market about the euro zone's economic outlook," said Gerhard Schwarz, head of equity strategy at Baader Bank in Munich.

"Certainly another year of sub-par growth into next year is not something that the market likes because investors have been banking on a recovery in corporate earnings and that might not (materialize) in this environment."

U.S. crude oil was trading down by more than $2 at $76.73 a barrel, while Brent crude futures also fell to $82.65, extending losses after top oil exporter Saudi Arabia cut prices to the United States.

GLOOMY EURO ZONE

The after-effects of the Bank of Japan's surprise stimulus move last week were also still being felt. The dollar took a breather but was still near multi-year highs against the yen and euro and with raised expectations that the ECB will eventually have to adopt quantitative easing.

The shift towards safe-haven assets such as core government debt pushed German bund futures <FGBLc1> up 0.3 percent.

"The macro backdrop in the euro area remains quite gloomy and there's no inflation, and in this environment central banks need to remain on an easing track," said Jan von Gerich, fixed income chief analyst at Nordea.

Despite the broader economic gloom, the European reporting season is not turning into the rout investors feared, with cost cuts helping to deliver earnings in line with or ahead of downbeat forecasts.

But investors have had to balance the earnings momentum against disappointing economic signals from China, where data on Monday showed manufacturing activity hit a five-month low, as well as downbeat euro zone manufacturing PMI numbers.

"Earnings have been better than expected overall and this is offsetting the bad macro data seen in Europe lately," said Alexandre Baradez, chief market analyst at IG France.

Asian stocks dipped on Tuesday as the latest signs of slower growth in China and the euro zone dampened the mood, although Japan bucked the trend and rose to new seven-year highs on the back of the monetary-stimulus momentum.
 

MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.2 percent.

Tokyo's Nikkei was up 2.7 percent after advancing to a peak last touched in October 2007, boosted by the yen's continuing weakness. Japanese financial markets were closed on Monday for a public holiday.

"Investors who missed the initial move are positioning themselves for the next lurch higher," said Raiko Shareef, currency strategist at Bank of New Zealand.

Repercussions from the yen's broad depreciation were felt in South Korea, where exporters extended losses on worries that a softer Japanese currency would erode their price competitiveness relative to Japanese rivals. South Korean shares <.KS11> were down 0.9 percent.

(Reporting by Lionel Laurent; Additional reporting by Blaise Robinson in Paris, Patrick Graham, Anirban Nag, Jemima Kelly, Emelia Sithole-Matarise, Atul Prakash and Alistair Smout in London; Editing by Gareth Jones)

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