EU Indices bounce on bargain hunting – SNB acts to weaken Swiss Franc

<p>European indices bounced from their lows on Tuesday as bargain hunters made their moves to pick up stocks at what they perceive to be cheap […]</p>

European indices bounced from their lows on Tuesday as bargain hunters made their moves to pick up stocks at what they perceive to be cheap valuations after yesterday’s sharp bearish moves that saw indices lose as much as 5% across Europe. It is the bargain hunting that is helping to bounce EU indices by over 1% in early trade with most of the bargain hunting taking place in the key mining and banking firms – two stock sectors aggressively sold out of yesterday.

There has been no change in sentiment however. The fears that drove markets lower yesterday are still evident today. What is pushing up stock prices is not therefore renewed bullishness but more so investors looking to make a quick buck and are picking up stocks in the short term expecting a quick bounce. Indeed, much of the buys we have taken this morning have been based on short term contracts. Given the sovereign debt problems and the political moves that we are watching this week including the contentious budget debate in the Italian Senate and Greek talks with the Troika to secure their next tranche of bailout loans, any stock market rally could be short lived.

RBS and Lloyds were two stocks that fell heavily yesterday, losing 12% and 7% respectively on concerns about a potential ratings downgrade and large charges related to sup prime mortgage selling. It is no surprise therefore that with bargain hunters making their move today, RBs and Lloyds shares are amongst the top risers in London FTSE 100 trade, rallying 3%.

Shares in Whitbread rose near 8% on Tuesday, hitting a new one-month high in the process after the hotel and coffee chain operator reported acceleration in like for like sales across the board. Sales at its hotel chain Premier Inn grew by 7.1%, up from 5% in the first half of the year, whilst sales at Costa Coffee also grew quicker at 9.7%.

Swiss National Bank intervenes to curb Franc strength from threatening its economy 
The Swiss National Bank today shocked the foreign exchange markets by setting a minimum exchange rate target on the euro/swiss of 1.20 francs, stating that it will ‘enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities’ to do so. The move was aggressive and reaffirms the SNB’s desire to prevent a further appreciation of its currency at a time when the European sovereign debt crisis could be about to turn down an escalating path, which could have increased the Swiss Francs popularity. The reaction was to see a huge 9% rally in the euro/swiss currency pair, with prices rallying from 1.12 to trade above 1.20 within a few minutes.

Whether or not this intervention will work remains to be seen, considering that most interventions in the currency markets by the authorities of late has only helped prices in the short term at best. If the euro crisis intensifies there is every chance the market could test the SNB’s resolve to hold the cross rate above the 1.20 level and traders will likely keep a close eye on inflation, which rocketed the last time the SNB undertook a similar intervention, to see whther this could refocus the SNB’s efforts somewhat in the future.

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