Rally in European Markets Stalls

European stocks were down around midday on Monday as investors took a breather following a sharp two-week rally and a key index hit strong resistance, although the retreat could be short-lived as recent central bank moves boost risk appetite.

At 1019 GMT, the FTSEurofirst 300 index was down 0.4 percent at 1,116.17 points, after reaching a 14-month high on Friday in strong volumes.

The euro zone's blue chip Euro STOXX 50 index fell 0.6 percent to 2,579.20 points, after running into strong resistance just below 2,611 points on Friday, a peak hit in mid-March.

Despite the day's retreat, investor sentiment remained relatively positive, buoyed by the U.S. Federal Reserve's fresh stimulus measures and the European Central Bank's plan to buy Italian and Spanish debt to ease the euro zone debt crisis.

The Euro STOXX 50 volatility index, Europe's widely-used measure of risk aversion, remained around 21.2 on Monday, hovering not far above a near two-month low hit on Friday.

"We've just raised our recommendation to a 60 percent exposure to stocks. There's no need to wait for a pull-back because the trend is very strong and volumes have increased a lot, that's a bullish signal," said Alexandre Tixier, technical analyst at TradingSat in Paris.

"We see funds getting back in, buying big cap companies, that's where the priority seems to be right now. There is absolutely no need to go short at the moment, not even as an hedge to protect portfolios."

The euro zone bank index - up 50 percent since ECB chief Mario Draghi said in late July that the central bank was ready to take all necessary measures to preserve the euro - was down 1 percent on Monday. Spain's Banco Santander dropped 1.5 percent and Italian bank Intesa Sanpaolo fell 2.1 percent.

Around Europe, the UK's FTSE 100 index was down 0.3 percent, Germany's DAX index down 0.2 percent, and France's CAC 40 down 0.6 percent.

Shares in Hennes & Mauritz were the biggest losers among European blue chips, sliding 2.1 percent after the world's second-biggest fashion retailer reported an unexpected drop in like-for-like sales in August.

Food major Unilever added 0.9 percent, boosted by a rating upgrade to 'buy' from 'neutral' by UBS.


After a three-month rally, the Euro STOXX 50 is up 11.4 percent this year, the DAX has gained 25.4 percent, the CAC is 12.7 percent higher, and Italy's FTSE MIB is up 9 percent.

UK shares have underperformed, with the FTSE 100 gaining only 5.8 percent this year.

"There is still good upside potential for stocks as we are re-pricing the 'non-break up' of the euro zone. We've just started to realise all the downside that came from the debt crisis," Louis Capital Markets trader Jerome Troin-Lajous said.

"Now, the main signal we need that would fuel this rally won't be coming from the economic outlook, it will come from the investment flows. A lot of foreign investors have been strongly 'underweight' European stocks and should start to switch out of bonds and out of U.S. equities and into European stocks."

Europe equity funds posted their biggest inflow since early May in the seven-day period through last Wednesday, according to data from EPFR Global. That signals a rise in appetite for European shares as tensions surrounding the euro zone debt crisis ease on the ECB's plan to buy Spanish and Italian debt.

Italy equity funds recorded their biggest weekly inflow since the current financial crisis began. In contrast, investors pulled more than $200 million out of UK equity funds, according to EPFR Global, which tracks conventional and alternative funds.

"The strong liquidity should boost stocks in the short term, it's a question of flow," Barclays France director Franklin Pichard said.

Pichard recommends buying an exchange-traded fund tracking the MSCI emerging equity index, such as the Lyxor ETF Emerging Markets, to get exposure to the segment of equity markets that have missed the strong gains of the past three months in developed stocks and look ripe for a catch-up rally.

"With the Fed's new stimulus measures, we will probably see flows going into emerging markets, just like we're seeing in Europe. Softer monetary policies in China and Brazil should also help."