By Jan-Patrick Barnert, Bloomberg reporter and Markets Live Commentator
European equities just had their first week in the red since mid-July, but by Friday afternoon the market was already bouncing back, which shows again that a lot of investors are ready to buy any dips even if stocks trade at record highs.
After falling sharply on Thursday, the Stoxx 600 managed to bounce off the lows and by the close on Friday the benchmark had already reversed about half of the dip. The quick reversal is a pattern seen many times this year, and few market participants expect the weakness to last.
“The correction should remain manageable,” says Steinbeis & Haecker Managing Director Markus Steinbeis. He points to real interest rates remaining negative and thus supportive of risky assets, and a global economy that “is likely to prove extremely stable.”
Given high cash positions and a lack of alternative investments, every setback for equities this year has proved to be short lived. And with last week’s selloff having possibly been exacerbated by Friday’s expiry of index options, this time may be no different.
Barclays strategists led by Emmanuel Cau note that similar option expiries in recent months all came with weaker markets and higher volatility “but ended up offering a buying opportunity.”
“As markets may be hitting an air pocket, we continue to advise hedges and a more selective risk exposure,” Cau writes. “But we think growth resiliency and liquidity factor will win out medium term.”
Concern over Federal Reserve tapering, which was among the main worries of investors last week, may be overcooked, says Esty Dwek, global market strategist at Natixis Investment Managers. The underlying strength of the U.S. economy means markets don’t need much more liquidity, she says.
A more important question might be when interest rates will start to rise, though that shouldn’t happen before 2023, says the strategist, who isn’t changing her asset allocation for now.
Not everyone is so relaxed. Earnings expectations have become highly optimistic, while richly valued sectors will have to digest a slightly less accommodative Fed policy, according to Philippe Uzan, deputy CEO and chief investment officer at iM Global Partner. “Opportunities still exist, but on a selective basis,” he says.