European Stocks Strike Back After Worst Day Since June 2016

(Bloomberg) -- European stocks are unsurprisingly rebounding from their worst day in more than two years.

Following a late reversal on Wall Street Thursday that restored the S&P 500 to little changed on the day after an initial 2.9 percent slump, the Stoxx Europe 600 rose 1.3 percent as it sought to catch up with U.S. equities.

Financial markets remain volatile on concerns that the fragile trade truce between China and the U.S. won’t last after the arrest of Huawei Technologies Co.’s chief financial officer. Treasury yields slid to the lowest since August after disappointing private sector job data prompted bets of a pause in the Federal Reserve’s rate, which means all eyes will be on the U.S. monthly payrolls data later. Talking about the Fed, Chairman Jerome Powell is still showing great confidence in the labor market before those employment numbers.

So, while we’re enjoying a nice bounce today, below the surface the picture is less rosy, with Thursday’s biggest losers struggling as the laggards of Friday’s fight back. Fortunes diverge widely among industry segments, with investors rushing into yield-sensitive sectors, along with consumer goods and services:

“Everyone is bearish, but no-one is short,” BofAML strategists wrote in their fund management survey. “Inability of oversold markets to react positively to Trump blink, Fed blink indicates capitulation to lower credit and equity allocations has begun.”

But the starting point for capitulation to lower risk allocations is high, at 67 percent equity allocation for the world’s largest sovereign wealth funds, the strategists said. Equity allocation at BofAML is 60 percent and Cash levels in long-only funds in the bank’s latest fund manager survey are less than 5 percent. Plus, there are still-high 35 percent to 40 percent net long positions at hedge funds.

What does all of this tell us? Investors are buying the dip, but in a very cautious manner, as they are bracing for the job numbers later, a risky weekend in Europe and the ECB rate decision next Thursday.

Further civil unrest is expected in France, with the “Yellow Vests” calling for more demonstrations. There is total uncertainty around Brexit, as Prime Minister Theresa May is said to be considering postponing the Dec. 11 Parliament vote, and some Leave campaigners are quietly preparing for a second referendum according to the FT. That’s a lot to digest for investors who desperately need some peace and quiet after the market’s erratic moves.

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