European Stocks Are Likely to Remain Volatile

Volatility is set to continue in major European stock markets when trading resumes on Tuesday after the Easter holiday, analysts told CNBC.com.

AP / AP

"I don't think we reached the bottom. I see more volatility and more downside potential," Thomas Bobek, head of equity strategy at Erste Sparinvest, told CNBC.com. "The initial causes for the downward trend will not be solved in the next few days."

On Thursday, just before the Easter break, a profit warning by Credit Suisse was the catalyst for another fall in stocks.

The bank said unprecedented market conditions in March - with wild swings in prices for stock and debt, and emergency interventions by major central banks - had introduced new uncertainty and made any profit unlikely for the first quarter.

Shares in Credit Suisse dropped by 11 percent at one point and closed more than 2 percent down on Thursday.

But a deal by JP Morgan to acquire beleaguered Bear Stearns for five times as much as proposed initially may lift spirits in the banking sector.

The new offer, which is roughly five-times the original deal price, sent shares of Bear Stearns soaring on Monday. Investors last week had bid Bear well above the original $2 per share offer on widespread belief that the sides involved in the negotiations would strike a pricier deal.

More Liquidity

Central banks pumped additional liquidity in the system to help banks cope with cash demands over the four-day Easter break, but some traders said the move created some worries in the already jittery markets.

At an unscheduled European Central Bank auction for an extra 15 billion euros ($23 billion), banks bid for four times as much, and overnight rates in the euro zone still indicated the markets were tight. The bid-ask spread on overnight cash was high at 4.17/4.22 percent.

Central banks are likely to pour money to try to stabilize the banking system, as the price of another failure in the sector would be too high, Geoff Wilkinson, head of research at Mint, told CNBC.com.

"I'm not really concerned about banks next week," Wilkinson said.

And after this week's rumors which caused the collapse in the share price of Britain's biggest mortgage lender HBOS, investors have a period when they will have time to stand back and think about the situation.

"It's a strong reality check," Elissa Bayer, Director of Private Clients, Insinger de Beaufort, said.

Executive directors, non-executive directors and senior managers at HBOS bought some 1.4 million shares last Thursday at 446 pence per share using their bonus entitlements, the company said in a statement on Sunday.

Watch out for Commodities

The big story for next week will be commodities, which are not as liquid as other financial instruments and which are likely to continue to fall, Wilkinson said.

"There's quite a lot of leveraged bets in commodities. The downside risk is becoming apparent," he said.

Commodity prices tumbled across the board on Thursday, with investors taking profits after a series of record highs. Traders sold gold to pay for losses in other markets, while oil and industrial metals fell on worries over the outlook for demand.

Oil and gold prices seesawed on Monday.

"It's hard for the market to come down in an orderly manner," Wilkinson said, adding that the crisis in the financial sector is likely to feed through in the economic activity. "Capital is very scarce, a lot of hedge funds are going bust."

Banks will probably ask clients to de-leverage positions and mining and oil stocks may get sold so people can get more cash.

"That may have implications for commodities and then for emerging markets," he said.

Investors are likely to watch carefully any indicators pointing to where inflation is going and also any moves from central banks, Bayer said.

A bit of optimism came at the beginning of the week from the U.S., where existing home sales data for February came in better than expected.

The pace of existing home sales in the United States rose in February to a 5.03 million-unit annual rate while prices took a record fall, the National Association of Realators said in a report.

On Wednesday, the Ifo survey of business climate comes out, and European Central Bank President Jean-Claude Trichet is due to hold a speech. GfK consumer confidence data in Germany is expected Thursday, and Friday will see the release of UK and French economic growth data and UK house prices.

© 2008 CNBC.com