Europe Stocks Going Nowhere as Lull Reigns in Trading Range

Updated on
  • Stoxx 600 has been trading in tight range for past two weeks
  • Market not relying on ECB, Investec Wealth & Investment says

European stock bulls yearning for a rebound from the worst selloff in four years are, instead, getting calm.

The Stoxx Europe 600 Index has traded in a 12-point range for the past two weeks, and a gauge tracking the region’s equity swings is on track for its fourth-biggest monthly drop on record. What’s more, investors are betting that the lull will remain, going by trading in volatility futures.

“People have to become comfortable that they are not about to be shocked by something unpleasant,” said John Haynes, head of research at Investec Wealth & Investment in London. His firm oversees 27.8 billion pounds ($43 billion). “Once the global economy sets its direction, then the European markets will find their feet again. The market isn’t particularly relying on the ECB to help out.”

Stocks are stuck in neutral as investors try to sort out which means more for the future of earnings: weakening economic growth in China or data showing Europe’s recovery remains on track. Two days before the European Central Bank’s policy update, hopes for further action were crushed after a report showed that lending conditions improved.

While the Stoxx 600 is heading for its first monthly gain since July, it has traded between about 354 and 366 since Oct. 5. The index has moved a daily average of 0.7 percent in October, the smallest moves since March. It barely budged on Wednesday, closing at 362.64.

This calm has led to a 32 percent drop this month in the VStoxx Index, a gauge tracking volatility expectations for euro-area shares. That took it to the closest level since Aug. 11 relative to futures betting on equity swings in the next three months.

The China-induced rout dragged the Stoxx 600 down as much as 18 percent from a record high, with commodity producers and automakers leading the losses. That sent the gauge’s valuation to 15.9 times estimated profits of its members, down from 17.4 in April. Yet economists have kept their forecasts for euro-area growth, projecting gross domestic product will increase 1.5 percent this year. That would be the most since 2011.

“This story about China has clearly been one of the main reasons why people have been unsure about earnings,” said Raimund Saxinger, who helps oversee 15 billion euros ($17 billion) as a fund manager at Frankfurt-Trust Asset Management. “If it becomes clearer that you are seeing a slowdown in China but not a hard landing, this should give more confidence to earnings expectations.”

For now, analysts have reduced their earnings projections for Stoxx 600 companies. They estimate profits will grow 2.8 percent this year, compared with 6.5 percent at the beginning of August, before China devalued its currency.

The fact that it’s the biggest losers from the rout that are rallying the most this month shows that the rebound isn’t based on fundamentals, according to Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. Miners and energy producers have jumped 12 percent or more in October after slumping at least 17 percent last quarter. Carmakers, which lost 24 percent in the past three months, have regained 9.6 percent.

“The market is going to be choppy in the short term,” Von Mehren said. “It’s caught between a better valuation and technically a reason to buy and, on the other hand, you have the cyclical picture getting worse. It’s a tug of war between those factors, and that’s why we’re not going anywhere.”