European Stocks: eyes on economic data

A virtually empty European corporate diary suggests that economic data and the outlook for interest rates will be the main focus for investors next week, equity strategists said on Friday, predicting more volatility.
The FTSEurofirst 300 index of top European shares has fluctuated between 1,552.77 and 1,630.69 points in the past three weeks. Standing at 1,589.03 points at 1200 GMT, it looked set to end the week 0.6 percent lower for a year-to-date gain of just over 7 percent.
"The lack of corporate announcements means that economic data will be clearly in focus," said Steffen Neumann, equity strategist at German bank LBBW, in a weekly outlook note. Key euro zone indicators due next week include the manufacturing purchasing managers index (PMI) for June on Monday, May producer prices on Tuesday and June services PMI on Wednesday.
US economic data highlights are the Institute of Supply Management's (ISM) June manufacturing survey on Monday, May factory orders on Tuesday, June non-manufacturing ISM on Thursday and June non-farm payrolls on Friday. The European Central Bank (ECB) and the Bank of England (BoE) hold monetary policy meetings on Thursday.
The ECB is widely expected to leave rates unchanged. Market watchers will scour the accompanying remarks for signals of hikes later on. "Attention will only be focused on the wording of its statement and the subsequent press conference," Commerzbank said, forecasting ECB rate hikes of 25 basis points each in September and December.
The BoE, however, is expected to raise its key rate by a quarter point to 5.75 percent. "Beyond this, the rate outlook remains less certain and the real debate concerns whether official interest rates reach 6 percent or above, as the yield curve is still pricing in," Investec Securities said in a preview note.
A steep rise in bond yields - euro zone 10-year government bond yields shot up to 4.66 percent by mid-June from 4.15 percent at end-April - has been seen by analysts as one of the main reasons for recent equity market volatility.
Mike Lenhoff, chief strategist at Brewin Dolphin Securities, saw stock markets supported by strong global growth and satisfactory valuations, but bond market jitters meant "equity markets aren't likely to get anywhere."
"They'll trade up, they'll trade down, they'll trade sideways," Lenhoff said. LandesBank Berlin said persistent interest rate worries, problems in the US mortgage market and oil prices above $70 a barrel boded for continued high volatility and choppy trading.
"In the third quarter, the focus will initially be on negative topics," HVB Equity Research agreed, pointing to the ramifications of higher interest rates and risks linked to the troubles in the US mortgage market. But Norwegian fund managers Skagen said the global investment climate remained good, despite some volatility.
"We see no fundamental reasons for the stock market to turn around any time soon," Skagen said. "The big gap that still exists between the valuation of corporate earnings and global bond yields means that equities are still undervalued."
Citigroup, in a global equity strategy note, said: "European equities look best placed for future outperformance. We would see any weakness as yet another buying opportunity." ABN Amro, too, maintained its upbeat assessment. "European equities still look attractive. Valuations look undemanding and consensus earnings forecasts achievable," it said in a note.
Chartists at BayernLB saw strong resistance for the DJ Euro STOXX 50 index at between 4,516 and 4,572 points and reiterated their slight overweight rating based on technical analysis. The index stood at 4,445.52 points at 1200 GMT. Next week's thin corporate diary has Nordic stock exchange operator OMX, which has agreed to be taken over by US bourse Nasdaq, reporting June trading on Monday.
British brewer and pub owner Greene King's preliminary full-year results are due on Tuesday and a first-half trading statement from British engineering company Morgan Crucible on Wednesday. British Airways reports June traffic on Wednesday followed by SAS and Easyjet on Friday.