Europe pares losses on defensive sector strength

Strength in the defensive stocks helped to recover European Indices from losses of more than 1% to close between flat and small losses on Tuesday’s trading session.

With key earnings from Intel and the minutes from the FOMC to come after European markets close, we have seen traders downsize the amount of risky asset classes they hold in their portfolio’s in case traders are left disappointed. We also have seen traders interpret the move by China to raise their bank reserve requirements by 50 basis points as a potential threat to global growth, and this has weighed on sentiment.

We are entering into a crucial period. Traders are pricing in more stimulus from the Fed and this is why special attention is being paid towards the minutes of the last meeting of the Fed. The Fed has said that they are prepared to act and the market seems to have believed them. Tonight’s FOMCminutes will need to confirm this as traders are unlikely to wait much further than a few months for the expected stimulus to come.

Moreover, earnings season is kicking off with Intel tonight, a bellwether for tech stocks, and JP Morgan to announce tomorrow. Naturally traders are looking to both the tech and banking giant to set a positive tone for the third quarter earnings season and with the FTSE trading at 5 month highs, the downside risks could be large should earnings disappoint and traders take profits on mass.

Most of the day’s weakness has been centred on commodity stocks which have been hurt by the move by China to curb excessive lending and a stronger Dollar. Both Copper and Crude Oil prices have suffered as a result and this has pressurised both the miners and oil shares today. Moreover, when traders are looking to minimise risk, the miners are typically the first sectors hit and today’s session had proved this yet again. Xstrata, Lonmin and Cairn Energy are amongst the worst 3 performers on the FTSE 100.

Defensive stocks higher
We have seen strong gains in pharmaceutical and tobacco stocks today, two sectors that usually benefit when traders are looking to move away from risky asset classes. It is this strength that has helped European markets to recover from earlier severe losses.