Stocks higher on bargain hunting as investors weigh corporate vs macro battle

Stocks across Europe traded higher on Tuesday as investors looked to bargain hunt in some of the recently badly beaten sectors such as miners and banking stocks. It is this bargain hunting that is helping indices across Europe to regain some of yesterday’s heavier losses, with the FTSE rallying 0.6%, the CAC up 1.2% and the DAX the standout performing Index, up 1.6% on the day.

However, there has not been a sincere change overnight in sentiment towards the debt issues suffered in the eurozone and the United States. Investors remain uneasy about the situation as a whole, particularly as we are awaiting some sincere action on both fronts this week; with the eurozone finance ministers meeting on Thursday to discuss the second bailout for Greece, and the US Congress looking to document a potential Plan B to raise the debt ceiling over the next 18 months.

Much of today’s gains therefore have been brought about by investors bargain hunting, attempting to pick up stocks that have seen sharp losses over the last few weeks as global indices have slumped. It is no surprise to therefore see near-term demand in banking and mining stocks, which are the two sectors to see heavy falls in the last few weeks. The FTSE 350 banking sector in particular had seen falls of 10% in July alone before today’s 1% sector gains. Banks Barclays and Lloyds Banking Group top the list of gainers on the FTSE 100 today as a result, rallying 3% on the day thus far.

Corporate earnings vs macro picture
Investors have been reassured to bargain hunt by a strong start to the new corporate earnings season in the US. It is IBM’s much better-than-expected second-quarter results that are helping to boost near term demand for technology stocks in Europe. IBM reported a 16% increase in new business at its services division, with new signings rising £14 billion to $144 billion, much higher than the consensus estimates of $130 billion. The FTSE 350 technology sector is higher on the day by 1%, with decent gains seen for ARM Holdings and CSR Group.

However, continued concerns over the macro economic picture is likely to keep gains on a leash until there appears a definitive resolution, or at the very least, signs of optimism that Europe will agree to a second bailout for Greece and that the US will raise the debt ceiling in time and without a set of too drastic deficit reduction commitments that may hamper the US recovery. Throw the reactions of ratings agencies into the mix too and it is in these three immediate issues where investors will want to see tensions calmed most.

Goldman Sachs downgrade of REITs hits British Land
On the downside to today’s equity session is property firm British Land, whose shares have been knocked by a downgrade in view by Goldman Sachs. The US house cut its view on the stock from ‘buy’ to ‘neutral’ indicating their belief that shares have outperformed of late, since the agency placed the stock on its ‘buy’ list. Similar negative actions by the US bank on sector peers Land Securities and Great Portland Estates have seen similar bearish sector consequences today.