European equities drop on valuation and China concern

European stocks fell in the second week of the year amid the highest valuation in 11 quarters for the benchmark STOXX Europe 600 Index and concern that quickening inflation in China would limit the scope for economic stimulus.

The STOXX 600 dropped 0.3 percent to 287.08 this week. The index rallied 3.3 percent in the week through Jan. 4, the biggest gain since Nov. 23, as US lawmakers approved a compromise budget that avoided most scheduled tax increases and delayed spending cuts in the world?s largest economy.

?Monetary policy has less punch in the beginning of 2013 than in the fourth quarter of last year, so one important equity driver is gearing down,? said Witold Bahrke, a senior strategist at PFA Pension A/S in Copenhagen. ?Now it?s up to the economic momentum to take over. Tactical indicators are at an extreme and political uncertainty is still an important risk factor.?

The price-earnings ratio for the STOXX 600 reached 19.1 times reported earnings, its highest level since March 2010, according to data compiled by Bloomberg.

Reports from China showed a measure of manufacturing expanded last month December for a third month, exports increased at almost three times the rate economists had estimated and inflation accelerated to a seven-month high in the world?s second-largest economy.

The quickening rate of price increases point to tighter monetary policy, a stronger currency to curb imported inflation, less liquidity and higher interest rates in the second half of the year, said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB.

German exports fell more than forecast in November, a report showed on Tuesday. Exports adjusted for working days and seasonal changes dipped 3.4 percent from October, the steepest drop in more than a year, the Federal Statistics Office in Wiesbaden said.

National benchmark indices retreated in eight of the 18 western European markets this week. France?s CAC 40 dropped 0.6 percent, while the UK?s FTSE 100 added 0.5 percent. Germany?s DAX lost 0.8 percent.

A gauge of commodity producers declined 3.3 percent this week, for the worst performance among the 19 industry groups on the STOXX 600. The index ranked 16th in segment returns last year.

A gauge of bank shares was the best performer this week, gaining 4.3 percent. Central bank chiefs at a meeting in Basel, Switzerland, on Sunday allowed lenders to use a wider range of assets to meet the so-called liquidity coverage ratio. The group of regulators also gave banks an extra four years to fully comply with the measure.

Source: http://libertytimes.feedsportal.com/c/33098/f/535603/s/2774aafe/l/0L0Staipeitimes0N0CNews0Cbiz0Carchives0C20A130C0A10C130C20A0A3552393/story01.htm

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