Europe needs to see earnings growth

European stocks fell as investors assessed equity valuations following the biggest weekly rally since March.

Sky Deutschland AG and Deutsche Boerse AG slipped at least 2.4% each after brokerages downgraded the shares. ArcelorMittal and Polymetal International Plc sent a gauge of mining stocks lower. TeliaSonera AB and Tele2 AB advanced after the Swedish company agreed to buy Tele2’s Norwegian business. PostNL NV rallied the most since February 2012 after boosting its profit forecast.

The Stoxx Europe 600 Index dropped 0.7% to 345.54 at 3:02 p.m. in London. The equity gauge rose 1.8% last week as U.S. jobs data exceeded economists’ forecasts and commodity producers rallied. The index traded at 15.6 times the estimated earnings of its members on July 4, near its highest valuation since 2009.

“What we need to see now is earnings growth,” said Michael Kapler, a portfolio manager at Mittelbrandenburgische Sparkasse in Potsdam, Germany. “Companies have to really deliver this time because equities are not so cheap any more. We might have some sort of correction in Europe if this earnings season disappoints, and there will be bigger questions concerning valuations. Figures out of the U.S. will give investors an indication of how business is doing, although expectations are already quite high for this quarter.”
 

Earnings Season
 

Alcoa Inc., the largest U.S. aluminum producer, unofficially kicks off the U.S. quarterly earnings season when it releases second-quarter financial results after the close of trading tomorrow. Profit for members of the S&P 500 (CME:SPU14) probably climbed 5% in the period, while sales rose 3%, according to analyst estimates compiled by Bloomberg.

In Germany, data from the Economy Ministry in Berlin showed industrial production slipped 1.8% in May.

National benchmark indexes fell in 14 of the 18 western European markets today. France’s CAC 40 retreated 1%, while the U.K.’s FTSE 100 and Germany’s DAX slipped 0.5%. The number of shares trading hands in Stoxx 600-listed companies was 19% lower than the average of the past 30 days at this time of day, data compiled by Bloomberg showed.

Sky Deutschland dropped 3.5% to €6.52. Nomura Holdings Inc. cut its rating on the stock to neutral from buy and lowered its full-year profit estimates for 2015, 2016 and 2017 because of higher-than-expected costs needed to increase subscribers. Nomura also said that British Sky Broadcasting Group Plc is unlikely to pay a premium for 21st Century Fox Inc.’s stake in the German broadcaster.

Deutsche Boerse declined 2.4% to €55.31 after Credit Suisse Group AG lowered it to underperform, the equivalent of a sell, from neutral. The brokerage said volume for exchange-traded derivatives will remain weak, and the German exchange operator will struggle to buy back shares or increase dividends in the near term.
 

BME Falls
 

Bolsas y Mercados Espanoles SA slid 3.5% to €34.02. Credit Suisse initiated its coverage of the Spanish exchange operator with a neutral rating, citing a market-share stabilization and limited potential stock gains.

A gauge of commodity producers fell 0.9% after closing at its highest level since February. ArcelorMittal lost 2.1% to €11.04, while Polymetal International declined 1.3% to 578.5 pence. BHP Billiton Ltd. fell 0.9% to 1,992 pence.

Quindell Plc fell 4.5% to 205 pence. The stock slumped 39% on April 22 after short-seller Gotham City Research LLC questioned the company’s profits. Let’s Gowex SA, also targeted by Gotham City, said it will file for insolvency and its chief executive officer resigned after admitting he presented false accounts for at least the past four years.

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