GLOBAL MARKETS: European Stocks Down, But Germany Bucks Trend

LONDON -- European stock markets were modestly lower Monday, tracking earlier losses on Asian markets as investors reacted with caution amid worries over the quality of upcoming third quarter corporate earnings. However, the German election result has generally been positively received.

"Last week’s defensive shift by investors does not necessarily signal the end of the rally, but given the scale and pace of the advance in recent weeks, it’s understandable that the temptation to bank profits has become too great to resist, especially with the quarter-end looming," said Ian Williams, strategist at Altium Securities.

And with the quarter coming to an end, there are mounting fears that the next set of earnings results out of the U.S. will not be as rosy as the previous quarter.

"Analysts are rebasing their forecasts for a cautious third quarter given that we came from a low base in 2Q, which was the reason behind market beating expectations. There are now fears that third quarter earnings will not look as good as second quarter earnings," said Tim Hughes, sales trader at IG Index.

At 0835 GMT, the Dow Jones Stoxx 600 index was down 0.4% at 238.11, London's FTSE 100 index was off 0.3% at 5067.70, Frankfurt's DAX index was up 0.4% at 5602.91, and the CAC-40 index in Paris was 0.4% lower at 3722.53.

Helping temper the weak tone in Europe as a whole was the result of the German election Sunday.

"Germany elected a center-right government committed to cutting taxes," said the market strategy team at Lloyds Banking Group in a research note, as German Chancellor Angela Merkel prepared to form a new center-right government after winning a second term.

Still, despite the recent bout of consolidation, risk remains on the upside in equities, said strategists at Goldman Sachs, noting the era of easy money, plus economic favorable data and underinvestment remains intact.

"Furthermore, a willingness to buy the dip has been the key to monetizing an otherwise low volatility, slow grind higher. Many came into September fearing a pullback, perhaps too many. Instead most dips this month have been used as buying opportunities and investors have been looking for ways to obtain upside participation at an increasing rate," they added.

Earlier Monday, Asian stock markets were sharply lower, tracking Wall Street's weak showing on Friday. Tokyo stocks were leading the losers, hurt by the Japanese yen's continued strength against the dollar.

"Concern over the yen’s recent appreciation and how this will impact profits in Japan is weighing heavily across the continent and with the month-end nearing, the potential for traders to keep taking money off the table amidst this current uncertainty cannot be overlooked," said Ben Potter, research analyst at IG Markets.

Japan's Nikkei 225 index closed 2.5% lower at 10009.52, after briefly slipping below the key 10,000 mark for the first time since July. South Korea's Kospi Composite was down 0.9%, and Hong Kong's Hang Seng Index was down 2.1%.

On Wall Street Friday, a prevailing concern that the nearly six-month surge in stocks may have overextended the current economic environment forced some of the best-performing companies of the third quarter into the red.

Overall, the Industrial Average slipped 0.4% to 9665.19, marking its fourth decline in five sessions. The index lost 155.01 points, or 1.6%, this week, snapping a two-week winning streak. For September, the DJIA remains up 1.8%. The Standard & Poor's 500 lost 0.6% to 1044.38, on Friday, closing out the week down 23.92, or 2.2%.

In the currency markets, the spotlight was on the rising Japanese yen. At 0845 GMT, the dollar bought Y89.54, down from Y89.76 late in New York trade on Friday. The dollar hit Y88.23 earlier, an eight-month low, with the yen bolstered by increased risk aversion as well as exporters' yen purchases for settling accounts before the end of the third quarter.

Japanese Finance Minister Hirohisa Fujii told reporters early Monday that he had no comment on the current level of the yen against the dollar, but the yen's recent strengthening trend was "not abnormal." He added that it was a mistake to use "foreign exchange dumping" to defend industry.

Royal Bank of Scotland said in a note that "investors may try to push the dollar below the year's low of Y87.10 in the early stage of this week. But still, we don't think the Japanese government will step into the market to curb the yen's rise."

The euro was also hit by increased risk aversion, and touched a two-month low against the yen of Y129.84. It was last at Y130.97 from Y131.72 in late New York trade on Friday. The euro was at $1.4627, from $1.4672.

Meanwhile, the sterling continued its recent selloff against the greenback. At 0845 GMT, sterling stood at $1.5890, compared with $1.5932 on Friday

Elsewhere, spot gold traded at $990.55 per troy ounce, down over $3 from the New York close, while the Nymex light, sweet crude contract for November delivery was 40 cents lower on Globex, at $65.62 per barrel.

European government bonds traded strongly Monday, boosted by the weak tone on the equity markets. At 0845 GMT, the December bund contract stood at 121.54, 0.06 higher.