The eurozone’s biggest stock markets are closing in on double-digit gains for the final quater of 2016, as a combination of resurgent banks shares and a weaker euro entice investors into a region that has disappointed for much of the year.
On Tuesday’s return from the Christmas break, Germany’s Xetra Dax 30 advanced 0.1 per cent in early afternoon trading, and is now up more than 9 per cent for the quarter. France’s CAC 40 edged higher, and is now almost 9 per cent stronger for the final three months of 2016.
A fourth-quarter rally in European equities, helped by shares of major exporters, has gone someway to repair the performance of a market that began 2016 tipped to do better than the US. While the Stoxx Europe 600 – the benchmark for eurozone equities – has jumped 5.1 per cent in the last three months, it is still 1.5 per cent weaker for the year.
Weakness in the euro, which was little changed at $1.0451 on Tuesday but is down 7 per cent against the dollar this quarter, has proved a boon for the region’s equities. German exporters were higher on Tuesday, in a trend analysts expect to continue. Volkswagen rose 0.8 per cent and Merck was up 1 per cent.
“The euro has fallen relative to the dollar,” said Markus Stadlmann, chief investment officer of Lloyds Private Banking. “This has the potential to boost inflation and to make exports leaving the EU more price competitive. This, in turn, could help to support profit margins of European companies making their share price valuations more favourable.”
However, it has been new-found appetite for bank shares that has driven much of the rally in European equities. Rising bond yields have eased some of the concerns around the profitability of the sector. The rebound in Deutsche Bank shares for the period is now at 54 per cent, though the stock was 1.3 per cent weaker on Tuesday. Shares of German rival Commerzbank are up 30 per cent in the fourth quarter.
While Italian banks have had a stellar month on hopes the government will intervene to support them when necessary, they were weaker on Tuesday. The sub-index tracking the sector was down 0.5 per cent in early afternoon trading, while the Italy’s benchmark index, the FTSE MIB, gained 0.2 per cent to 19,383.52.
The weakness in the banks came after the European Central Bank said that the capital shortfall at Monte dei Paschi di Siena rose to €8.8bn from €5bn, significantly increasing the price tag of the rescue of Italy’s third-largest lender by the government.
Monte dei Paschi’s shares were suspended again on Tuesday. Banco Popolare di Milano fell 2.4 per cent and Unicredit was down 0.7 per cent.
Analysts at Deutsche Bank were sceptical of the size of the Italian government’s facility to provide support to the country’s weaker financial institutions.
“We would argue that a truly effective backstop should be larger than the size of the problem,” said Marco Stringa, senior economist at Deutsche. “That said, even if the plan does not go as far as providing a comprehensive backstop to address the system-wide non-performing loans issue, it is still a significant step forward for the weakest banks. It should reduce the risk of financial instability at least in the short term.”
Elsewhere, the Athens General index remained set for the best gain of the fourth quarter among eurozone markets. It gained just over 13 per cent, helped by a recovery among its financial stocks. Bank of Pireaus led the pack on Tuesday, adding a further 7.8 per cent and taking its advance since the start of September to 56 per cent.