Europe pares losses on defensive sector strength

<p>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 […]</p>

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.

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.