European stocks faced a downturn on Wednesday as investors opted for a cautious approach, waiting for clearer signals from central banks indicating a readiness to adopt more accommodative policies. The Stoxx Europe 600 Index concluded the session with a 0.9% decline, marking its most significant drop since November 10. Sectors such as construction and mining, classified as cyclical, experienced share price declines. The negative momentum occurred ahead of the release of the latest Federal Reserve minutes later in the day.
Luxury stocks, notably heavyweight LVMH, underperformed as UBS Group AG analysts predicted a weak earnings season for the sector, citing limited visibility for the rest of 2024. French rail stock manufacturer Alstom SA registered the most substantial individual decline, sliding after Barclays Plc analysts reiterated their underweight rating on the stock and highlighted persistent pressures.
On a positive note, pharmaceutical stocks emerged among the notable gainers following supportive comments from Jefferies analysts. Danish container shipping giant A.P. Moller-Maersk A/S also rose after receiving an upgrade from Goldman Sachs Group Inc. The company had halted its ships from sailing through the Red Sea amid attacks by Houthi rebels, and Goldman noted that such detours would increase freight costs and enhance Maersk’s free cash flow.
European equities have witnessed a slow start to the year, prompting investors to question the sustainability of a strong rally that commenced at the end of October, especially with the fourth-quarter results season approaching. Over the past two months, the Stoxx 600 Index has gained approximately 10%, driven by real estate and technology stocks following signals from the Federal Reserve that its hiking campaign could conclude.
While some market participants remain cautious, Citigroup Inc. strategists advise against “chasing rallies” and emphasize the potential for rising equity market volatility as central bank easing begins. The note from the Citigroup team led by Beata Manthey highlights that market positioning is currently the most bullish since 2019, implying potential near-term vulnerabilities.
Europe’s benchmark gauge closed the year at its highest level since January 2022, while Germany’s DAX Index reached a record in December. Michael Field, European market strategist at Morningstar, expresses concern about valuations despite ongoing momentum, stating, “There’s not a lot of headroom for equities.”
