There's life in the bull run yet

Despite a bad week for European stock markets, and unsettling signals from America, equities are not on their last legs

European stocks and bonds suffered one of their worst weeks of the year last week, but investors are sanguine that this is a temporary setback and the bull market still has some way to run.

All major European stock markets fell last week, dropping as much as 5.6 per cent in Spain, 3 per cent in France and the Netherlands, 2.5 per cent in Germany and 1.35 per cent in Britain as investors faced bad news on all fronts. The Italian government collapsed, interest rates rose in no fewer than six European countries and US Federal Reserve chairman Alan Greenspan said that with more people in work, US wages could rise, triggering higher rates.

Even though investors blanched and tightened the purse strings last week, some are now choosing to hold or even boost European stock exposure.

"We were surprised by the German move, but not shocked. The underlying European economy is strong enough and the rate rise has come early enough that we don't expect there'll be a follow-up of sharp increases," said Felix Lanters, European equities manager at ABN Amro Asset Management. "We can no longer count on falling interest rates to help stocks, so performance will depend on good profit growth, and that's what we expect to see."

Mr Lanters is not alone. Several investors on both sides of the Atlantic that are betting that European companies will continue to drive profit growth and push share prices higher, surpassing returns generated from investing in US equities.

"People aren't giving enough weight to what is going on in the US," said David Harris, European equities manager at New York-based Stein, Roe & Farnham Investment Management. "People are looking at the US through rose- coloured glasses and are buying on the dips. The valuations are too high."

The US Labor Department said prices paid to factories, farmers and other producers rose 0.5 per cent in September, surpassing the 0.2 per cent increase anticipated by analysts. "The US has under-reacted this time. It's getting too frothy," said Mr Harris. "Europe might see a healthy short-term pause, but I don't see a prolonged bear market. Europe is still more attractive than the US."

The Dow Jones Industrial Average ended the week virtually unchanged from the start, but it seesawed between single-day gains and losses of more than 1 per cent on four days, pulled and pushed by a combination of better- than-expected earnings coupled with inflation concerns.

The producer prices report came a day after Germany's Bundesbank raised interest rates for the first time in five years, sparking a series of rate increases in France, Denmark, the Netherlands, Austria and Belgium. That dented bond markets round the globe. German and French bonds led falls in Europe, with the yield on the benchmark 10-year bund rising 6 basis points to 5.62 per cent and the yield on the 10-year OAT up 4 basis points to 5.62 per cent. The yield on the 30-year Treasury jumped 7 basis points to 6.42 per cent.

The attraction of bonds is diminishing as they are unlikely to repeat the handsome gains seen so far this year. Rising interest rates reduce the attractiveness of fixed-income securities. "Any numbers that are worse than expected are going to push the markets lower," said Phyllis Reed, a bond strategist at BZW. "There's a lot of sensitivity to these reports. The market had got complacent about inflation."

That may prove to be a boon for equities. "In the end, where else will investors put their money?" asked Eugen Melliger, a fund manager at Credit Suisse.

One major question looming over Europe is Italy, as President Oscar Luigi Scalfaro began meetings to form a new government, replacing that of Prime Minister Romano Prodi, which fell on Thursday amid budget rows. Prodi's centre-left government stepped down yesterday after losing the backing of its coalition partners of the Rifondazione Comunista party, who refused to back welfare cuts. Elections cannot be held until late November.

Start your day with The Independent, sign up for daily news emails
News
election 2015The 10 best quotes of the campaign
News
A caravan being used as a polling station in Ford near Salisbury, during the 2010 election
election 2015The Independent's guide to get you through polling day
News
people
Voices
David Blunkett joins the Labour candidate for Redcar Anna Turley on a campaigning visit last month
voicesWhat I learnt from my years in government, by the former Home Secretary David Blunkett
ebooks
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Guru Careers: Management Accountant

£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

Guru Careers: Project Manager / Business Analyst

£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

Day In a Page

General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

'We will not sit down with Nicola Sturgeon'

In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

How ordinary Britons celebrated VE Day

Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
They came in with William Caxton's printing press, but typefaces still matter in the digital age

Typefaces still matter in the digital age

A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

'Missing link' between Earth's two life-forms found

New microbial species tells us something about our dark past, say scientists
The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

Pan Am Experience: A 'flight' back to the 70s

Tim Walker checks in and checks out a four-hour journey with a difference
Humans aren't alone in indulging in politics - it's everywhere in the animal world

Humans aren't alone in indulging in politics

Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
Crisp sales are in decline - but this tasty trivia might tempt back the turncoats

Crisp sales are in decline

As a nation we're filling up on popcorn and pitta chips and forsaking their potato-based predecessors
Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

Ronald McDonald the muse

A new wave of artists is taking inspiration from the fast food chain
13 best picnic blankets

13 best picnic blankets

Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
Barcelona 3 Bayern Munich 0 player ratings: Lionel Messi scores twice - but does he score highest in our ratings?

Barcelona vs Bayern Munich player ratings

Lionel Messi scores twice - but does he score highest in our ratings?
Martin Guptill: Explosive New Zealand batsman who sets the range for Kiwis' big guns

Explosive batsman who sets the range for Kiwis' big guns

Martin Guptill has smashed early runs for Derbyshire and tells Richard Edwards to expect more from the 'freakish' Brendon McCullum and his buoyant team during their tour of England
General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'