By Simon Jessop
LONDON, March 29 (Reuters) – European shares extended their recent slide to hit a three-week closing low, with several indexes breaching chart support levels as traders took further profits at the end of a stellar first quarter.
Cyclical stocks led the charge lower on Thursday, with autos and financials the main fallers followed by retailers after below-forecastearnings from Hennes & Mauritz .
Adding fresh weight to moves out of stocks more exposed to the economic cycle was an OECD report that highlighted the fragile state of the economic recovery, although quarter-end profit-taking also contributed, traders said. Weak U.S. jobless claims added to the gloom
By the close, the FTSEurofirst 300 index was down 1.2 percent at 1,059.21 points, but still on course for its best first quarter since 2006. World stocks, meanwhile, are eyeing the best first quarter since 1998.
A Reuters poll of analysts and fund managers pointed to further gains to year-end, although the pace is set to slow in the second quarter.
The cheap central bank money that had fueled the first-quarter rally was now petering out, in a similar fashion to market moves after the last batch of U.S. quantitative easing (QE), and the market now faced several weeks of sideways trade, Nicolas Just, head of core equities at Natixis-AM said.
“The pullback dates back two weeks or so… but it’s difficult for us to buy in the hope the market will increase. Investors have been buying on a short-term basis for the last three months and are now wondering what will happen next.”
Political uncertainty around the elections in France, the merging of Europe’s bailout funds, as well as the prospect of more U.S. QE were all being watched by markets as potential trigger points for the next leg of the rally or a deeper fall.
“Investors are not in risk-off mode yet,” he added, citing still-low levels of implied volatility, which had only seen a “modest spike” as a result of the recent pullback.
By the Thursday close, implied volatility as measured by the Euro STOXX Volatility index was up 9.9 percent at 25.36. It is still down 16 percent since the ECB launched its first long-term funding operation in December, however.
“When you look at the term structure of volatility, out to one year, it’s going up. Nobody believes the low-volatility environment will continue. Something has to happen.”
Recent breaches of the 50-day moving averages in both the FTSEurofirst 300 and Euro-STOXX 50 extended a break of the uptrend begun in late November.
A similar move through their 23.6 percent Fibonacci retracements of the recent three-month rally, two key support levels, sent a bearish technical signal to the market. The next strong support levels are on the 38.2 percent Fibonacci retracement of the rally, at 1,048.37 and 2,447.67 for the FTSEurofirst 300 and Euro STOXX 50, respectively.
In spite of the technical pressure and signs in the options market of increased pessimism, with a rise in demand for put protection to protect against further short-term falls, the case for equities over other asset classes remained strong for some.
“Last year we said there is too much uncertainty, there is too much risk … (But now) there is no reason not to own equities at the moment,” Andrew Parry, chief executive at Hermes Sourcecap, said.
“When you have bond yields at 2 percent, you cannot make very much money. The central banks around the world are sponsoring low bond yields and high inflation.”
The Reuters poll of stock market participants expected emerging markets to pick up the baton and lead index gainers later in 2012.
Just said he had become more defensive in his sector positioning, cutting financials to neutral and targeting emerging markets-exposed firms, such as LVMH.
After a quarter marked by low volumes, Thursday was an above average day, at 115 percent of the 90-day daily average, helped by heavy trade in UK power producer International Power.
The firm rose 5.6 percent in trade more than 15 times its average to be the top gainer on the FTSEurofirst 300 after French firm GDF Suez bid 6 billion pounds ($9.51 billion) for the 30 percent of the firm it does not already own.
However, Swiss lender UBS flagged still-cautious first-quarter behaviour from clients at its flagship private bank, with many still preferring to hold cash in the face of Europe’s economic woes and the long-running debt crisis.
“Clients are looking for sustainable improvements in what they see primarily in Europe,” UBS’s financial head Tom Naratil told investors at a brokerage conference on Thursday.
That sign of improvement was markedly absent from peripheral bond markets on Thursday, however, as both Spanish and Italian yields rose in spite of a broadly successful auction of Italian debt.
In response Milan’s FTSE MIB ended down 3.3 percent, weighed by a chunky fall in UniCredit and other big holders of government debt.