European equity markets gained for the second day on Tuesday, but the sustainability of the recovery from eight-month lows may depend on global leaders taking swift action to stimulate economic growth and tackle the euro zone crisis.
Expectations of such action have grown following a run of glum data last week. A telephone call between the finance chiefs of Group of Seven industrialised nations on Tuesday, a European Central Bank meeting on Wednesday and a speech by US Federal Reserve Chairman Ben Bernanke on Thursday were all seen as possible windows for policy announcements.
The Euro STOXX 50 was up 0.3 percent by 09:37 SA time at 2,084.90 points, adding to Monday's 0.5 percent gain and continuing its recovery from an eight-month trough of 2,050.16 set last week.
A 20 percent slump since mid-March has left the euro zone blue chip looking attractive on valuation, taking down the price to earnings ratio to around 9.3 times compared to a long-run average of around 14 times.
“Yes, there has been some bounce and I think that's fair because valuation is very compressed ... If I was a long only manager I would be adding to my risk now,” said Steen Jakobsen, chief economist at Saxo Bank.
“But the tail risk remains with Greece, it remains with Spain and recapitalisation of banks so you could still risk 10-20 percent on the downside.”
Underlining the potential risks to investors, Spanish Treasury Minister Cristobal Montoro said that at current borrowing costs financial markets were currently shut to his country. In Tuesday's more risk positive mood though, markets chose to shrug off the comments, with Spain's IBEX index still gaining 0.7 percent.
Volatile financial stocks - which are most directly exposed to the euro zone crisis through their loan portfolios and debt holdings, and which are also well-placed to benefit from any central bank measures - were among the top performers. The STOXX euro zone banking sector index added 1.3 percent.
Prospects for global action to tackle the crisis also lifted oil prices, which in turn helped heavyweight energy companies. Total added 1.2 percent, serving as the biggest single-stock boost on the Euro STOXX 50.
Australia on Tuesday kicked off what investors hope will be a global round of stimulus measures, cutting interest rates for the second month in a row.
The G7 finance chiefs will hold emergency phone talks on the euro zone debt crisis on Tuesday in a sign of heightened global alarm about the threat posed by strains inside the 17-nation monetary union, including Greece possibly leaving the bloc.
A G7 source familiar with plans for the call said the group would urge more progress at an EU summit on June 28-29. That alone would leave the door wide open for disappointment among financial investors betting on concrete actions.
“If policymakers act, they would probably wait for the results of the (June 17) Greek election,” said Benoit Peloille, investment strategist at Natixis, stressing “a very cautious bias” on European equities in the short term.
From a technical point of view, the outlook for Euro STOXX 50 remains gloomy after the index dipped below November's troughs last week.
“The break confirms that the market holds its next target below the 2011 low point. Accordingly we are still very much in favor of selling temporary bounces such as the current one,” strategists at SEB said in a note.
A second day of public holidays in Britain was seen keeping volumes low, potentially adding to market jitters. - Reuters