European stocks are set to stay range-bound this week as the subprime crisis continues to take its toll on confidence and rising inflation means investors do not expect the European Central Bank to cut rates any time soon.
"I think we are stuck in the middle of a trading range,” Olaf Siedler, European fund manager at Schroders Investment Management, told CNBC.com. “The subprime crisis is still rumbling on.”
Only a recovery in financial stocks could signal the beginning of the end for market troubles, many analysts agree, but the recent spate of rights issues from banks such as Credit Agricole and UBS, have done little to reassure investors.
“People are suffering from rights-issue fatigue,” Siedler said, “all you’re doing is throwing money into the pot to repair past mistakes … and it’s very unsettling. The whole sector is very brittle and it shouldn’t be by now.”
Staying on the sidelines to see what happens may be a good idea, according to Siedler, as there is no major positive catalyst to lift sentiment.
Traditionally market participants close their books in May and leave for a summer break, which could be advisable as Siedler says the best they can hope for is stocks drifting along at these levels.
The market stalemate comes at a time of celebration for the ECB, as it marks ten years since its launch on June 1, 1998, but above-target inflation and deteriorating economic performance could take the shine off the ceremony where ECB President Jean-Claude Trichet will take to the stage to look back on the union.
After next Thursday’s interest-rate decision Trichet will give a “very hawkish” statement, according to Siedler. “A decrease at the moment I think is out of the question,” said Siedler who expects no move in euro-zone monetary policy this year. European Union first-quarter gross domestic product numbers will add to the sense of reflection when they’re released on Tuesday.
Meanwhile, the Bank of England is also expected to have its hands tied by the soaring cost of goods, and shelve its rate-easing cycle when it announces its decision Thursday.