Morgan Stanley Sees Possible Downturn as European Stocks Retreat

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  • Linde tumbles after talks with Praxair end without agreement
  • Commodity producers and banks post biggest losses on Stoxx 600

European Stocks Extend Losing Streak to a Third Day

European stocks fell for a third day as investors fretted that central banks may be less willing to use monetary policy to spur economic growth. To Morgan Stanley, the market rout that started last week could well be the start of a more serious downtrend.

Economic and cross-asset indicators show the euro area may have entered a “downturn phase,” where risk assets tend to underperform, Morgan Stanley strategists including Andrew Sheets and Phanikiran Naraparaju wrote in a note dated yesterday. The Stoxx Europe 600 Index closed 1 percent lower, paring earlier losses of as much as 2 percent, with no industry groups gaining.

The rally that pushed the Stoxx 600 up as much as 14 percent from a Brexit-induced low has sputtered, with the number of shares changing hands on Monday 21 percent greater than the 30-day average as a gauge of equity volatility surged the most in a month. European Central Bank President Mario Draghi downplayed the need for more stimulus on Thursday, even as economic data miss forecasts by the most since April. Federal Reserve Bank of Boston President Eric Rosengren warned that the U.S. economy could overheat if rates aren’t raised soon.

“It was only a matter of time for this selloff as we had seen post Brexit a really notable rebound in markets, even if fundamentals hadn’t improved accordingly,” said Ralf Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf, Germany. “There’s also the risk of the Fed meeting coming up because there is very little potential positive impact of the Fed postponing a rate hike. On the other side, if there were a negative surprise, there could be some downside. I see more declines ahead.”

Investors have pulled cash from the region’s equity funds for a record 31 weeks, according to a Bank of American Corp. report last week. A speech today from Fed Governor Lael Brainard -- seen as a leading opponent of rate increases -- will be in focus for any indications of the likely trajectory of interest rates in the world’s biggest economy before next week’s Fed meeting. Any hawkish shift in her tone may spur volatility in financial markets, which put the odds of a hike in borrowing costs this month at 28 percent.

In their report, the Morgan Stanley strategists said that cycle indicators across developed markets have stalled, indicating increased risk of a shift from “expansion” to “downturn.” The Stoxx 600 has fallen 6.5 percent this year, compared with gains of at least 4.3 percent for the S&P 500 Index and MSCI Asia Pacific Index.

After a two-month surge in banks, a gauge tracking them sank the most in more than a month. HSBC Holdings Plc fell 2.2 percent, weighing heaviest on the index. Greek, Italian and Spanish lenders also posted large declines, sending their national indexes down the most among western-European markets. The FTSE MIB Index, ASE Index and IBEX 35 Index tumbled at least 1.7 percent.

Miners were among the worst performance of the 19 industry groups on the Stoxx 600 today, with Anglo American Plc and BHP Billiton Ltd. falling at least 2.6 percent as commodity prices dropped. Daimler AG and BMW AG dragged automakers lower with losses of at least 1.7 percent.

Among stocks moving on corporate news: 

  • E.ON SE fell 3.2 percent in volatile trade after spinning off its Uniper SE fossil-fuel unit. Uniper rose 3.1 percent.
  • Associated British Foods Plc tumbled 11 percent, the most since the aftermath of the Brexit vote, after saying that sales at its budget fashion chain Primark dropped over the summer.
  • Linde AG fell 7 percent after announcing it terminated talks for a combination with Praxair Inc. that would have created the world’s largest supplier of industrial gases. 
  • RWE AG lost 1.7 percent after confirming plans for a fourth-quarter initial public offering of shares in its new renewables, grid and retail business Innogy SE.
  • Siemens AG retreated 1 percent after people familiar with the matter said the German engineering company is considering a sale of its remaining stake in Osram Licht AG. Osram climbed 10 percent. 
  • SVG Capital Plc jumped 15 percent after HarbourVest Global Private Equity Ltd. offered to buy it for about 1 billion pounds ($1.3 billion) in cash.
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