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Miners prop up European shares but earnings worries remain

Source : REUTERS
Last Updated: Tue, Apr 09, 2013 11:30 hrs

* FTSEurofirst 300 rises 0.3 percent

* Miners respite on China data, Alcoa results

* Staffers fall as CS highlights PMI worries

* Diageo dips after recent run raise valuation concern

By David Brett

LONDON, April 9 (Reuters) - European shares held onto gains around midday on Tuesday as miners rose on higher metals prices after Chinese data strengthened demand prospects and after Alcoa kicked off the U.S. earnings season with a profit rise.

By 1114 GMT, the FTSEurofirst 300 was up 2.14 points, or 0.18 percent, at 1,166.93.

The index has found support around its 38.2 percent retracement level of 1,154, which it struck after three days of declines last week on the back of rising euro zone debt tensions and weak U.S. jobs data.

Miners, which have lagged wider gains in Europe by around 18 percent in 2013, rose 2.4 percent after inflation data from leading metals consumer China fuelled expectations that its monetary stimulus would stay in place and help support economic growth.

That brightened the outlook for demand and brought some relief to a sector, for which earnings estimates have been cut by an average of 5.7 percent over the last 30 days, according to Thomson Reuters Starmine data.

UBS said the recent weakness in the UK mining sector presented an opportunity to buy, while Citigroup said BHP Billiton was the best positioned large cap diversified miner, with a high-quality asset base and low-cost production.

Miners are among the most shorted stocks in Europe at around 9 percent of the sector's stock, compared with a market average of about 6 percent, according to data from Markit.

Miner ENRC, the third most shorted stock on the UK's FTSE, extended a four-day rebound by 4.2 percent.

U.S. aluminium group Alcoa, viewed as a leading indicator for the materials sector and for the U.S. earnings season, posted better-than-expected first-quarter profit on lower-than-expected revenue.

Its shares fell, but it helped boost sentiment toward Europe's mining sector.

With economic data light in the coming days and growth anaemic in Europe, the U.S. earnings season is likely to have a bearing on sentiment as investors await evidence that earnings growth can be strong enough to support recent price gains.

Ian Williams, equity strategist at Peel Hunt, said he was waiting to see whether companies on both sides of the Atlantic pull back on performance outlooks, given that recent data have reduced prospects for economic growth.

"That could delay the upgrade cycle, leaving indexes a bit vulnerable given how far valuations have come since last year, from around nine times 12 months forward price-to-earnings (PE), to 12 times," he said.

STAFFING WORRIES

In Europe, earnings expectations have been cut by around 1 percent for the full year in the past 30 days, leaving question marks over the sustainability of the 10 percent gains seen in European shares since last June.

European staffing firms Randstad and Adecco fell 2 percent and 1.9 percent, respectively.

They could fall as much as 6 percent as increasingly challenging economic conditions in the United States and Europe weigh on the outlook for jobs growth, according to Credit Suisse. The Swiss bank cut earnings estimates for both companies by 4 percent for the short term.

Among the top fallers was drinks firm Diageo, which fell 2.6 percent.

"Diageo's valuation looks toppy. It has had a fantastic run in recent weeks, and it looks like just profit-taking," Ronnie Chopra, head of strategy at Tradenext, said.

Defensive stocks, which offer protection in the face of an austere economic backdrop, have led the index higher so far this year, and the food and beverage sector has re-rated to around 20 times PE.

Elsewhere, Airbus parent EADS shed 3 percent to 37.55 euros after French media group Lagardere sold most of its 7.4 percent stake in a price range of 37.35 euros to 37.45 euros a share, traders said.




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