Europe: Recovery rally for stocks leaves oil sector behind

[LONDON] European shares enjoyed a recovery on Thursday, snapping their longest losing streak since October 2016 as the cyclical sectors which had driven a market-wide sell-off made a comeback, though oil was a weak spot.

The pan-European Stoxx 600 index climbed 0.8 per cent, with the cyclicals-heavy DAX up 0.6 per cent.

Financial services, autos and technology sectors were among the best-performing, driving the market higher.

"European equities suffered recently from the stronger euro and some early profit-taking before the end of the year," said Valentin Bissat, European equity strategist at Mirabaud Asset Management.

"After the recent underperformance, we should see cyclicals outperform again in the next few weeks with long-term interest rates rising and a steeper yield curve," he added.

Shares in energy firms lagged, however, with Europe's oil and gas index hitting a one-month low after Reuters reported that Norway's trillion-dollar sovereign wealth fund had proposed to drop oil and gas companies from its benchmark index.

David Hussey, head of international core equities at Manulife Asset Management said the Norwegian proposal implied a negative long-term view for the sustainability of oil & gas cash flows to which Norway is clearly exposed.

"It's a brave decision but realistic and forward thinking. (I) suspect they'll run down the oil and gas holdings gradually over time," Mr Hussey said.

Elsewhere investors continued to digest a raft of earnings updates, with most of the top movers reacting to results.

French telecoms firm Bouygues rose 5.2 per cent after raising its profitability goal for the year, buoyed by a robust 37 per cent jump in nine-month operating profits.

Troubled British engineer GKN was the biggest faller, down 4.8 per cent after it announced a further write-off.

Broker action was also a driver. Biotech firm Genmab rose 6.8 per cent after Bernstein rated it an"outperform", while Wirecard shares gained 4.5 per cent after Berenberg recommended buying into the payments sector.

Italian banks Banco BPM and BPER Banca were among the top fallers after Banca Carige failed to clinch a cash call, reigniting fears around bad loans in the sector.

European equity strategists at Bernstein said recent risk aversion created a buying opportunity as a "robust" earnings outlook continued to provide fundamental support for the market.

Overall the MSCI EMU index of euro zone companies is tracking earnings growth of 10.7 per cent in dollar terms for the third quarter, with basic materials, financials and technology the main drivers of earnings beats. The broader MSCI Europe index is delivering 10 per cent earnings growth.

Investors emphasised earnings beats were not all they were looking for, saying companies this quarter had delivered slightly disappointing top line revenue growth.

"Earnings are standing up better than revenues this quarter," said Andrew King, head of European equities strategy at BNP Paribas Investment Partners.

"We'd like to see a bit more top line driven profit growth going forward if we're really to get enthused about the profit recovery," he added.

REUTERS