Europe's Recent Rally May Be Cut Short Next Week

A recent bear-market rally in Europe may be cut short next week, when stocks are likely to be dragged lower as investors balk at the rising price of oil and fears that the financial sector woes are not over, return to haunt the markets.

AP

“Next week will be the crunch point and the weight has now shifted back to the opinion that it was a suckers’ rally and to take a bit of profit and retreat to the sidelines,” Jason Forde, fund manager from Kepler Landsbanki, told CNBC Europe.

European stocks have enjoyed some positive momentum since the middle of March, with previously sold-off banking stocks being bid up on the hope of a turn around in the sector. But investors have remained divided as to whether markets really have passed the worst effects of the credit crisis or the bear market is just getting started. 

The added effect of declining oil and basic resource stocks could tip the delicate balance and spell a prolonged sell off in stocks, Forde argues.

“In the whiplash after a bear market rally all sectors are sold down indiscriminately,” Forde said, adding that cash is the safest option in the face of potential declines.

Interest Rates and Earnings

Investors will also be further digesting last week's interest rate decisions from the European Central Bank and Bank of England, as their inflation fighting priorities become further underscored by rising price of core goods.

Both banks held interest rates steady Thursday, with the ECB Chief Jean-Claude Trichet giving no hint of easing euro zone monetary policy in the coming months.

Corporate earnings will also provide essential reading as steel maker ArcelorMittal, Spanish utility Endesa, crude-oil exporter StatoilHydro and many more report numbers.

French banks BNP Paribas, Credit Agricole and Societe Generale will be in the spotlight when they deliver earnings and try to further distance their balance sheets from the ongoing fallout in the sector.

The week could start with thin trading volumes as Germany, France and Switzerland all enjoy a public holiday on Monday.

© 2008 CNBC.com