More falls for European stocks despite brief reprieve in US jobs data

European stock indices suffered yet more heavy losses on Friday as investors continued to run for the hills before the weekend break, forcing the FTSE 100 lower by another 2%. Even a brief reprieve for the markets in the form of a stronger-than-expected non-farm payroll reading of US jobs was not enough to change the bearish theme to trading, with the payroll-induced bounce in stock prices quickly sold into.

European indices started the session heavily lower, with investors playing catch up to heavy falls of 4.7% in US markets overnight after EU markets closed yesterday. This opened the FTSE and DAX both sharply lower by between 2% and 3% upon market open.

This week has seen some of the heaviest falls for global indices since the heights of the credit crisis. Unfortunately the dark days of 2008, when stock drops of 5% to 10% became a normality, remain fresh in the memory of investors in today’s markets. With well entrenched concerns over growth in the US, European and emerging market economies, investors are unwilling to carry risk in case the situation worsens next week.

Rumours in the market that the S&P may downgrade its credit rating on the US after the US close hardly helped the uncertainty and nervousness in the markets.

We have see short bounces in asset prices from their lows in parts today, with stocks bouncing around like a cork in a bath for much of the afternoon trade as short term bargain hunters and medium term sellers turned share prices choppy. European stocks however took much of their lead in the afternoon from the US markets.

US non-farm payrolls come in higher than expected
Data out on Friday showed that US labour market activity in July proved stronger than had been previously expected. Non-farm payrolls grew by 117,000, more than the 85,000 estimated whilst private payrolls also saw a bounce, with 154,000 jobs added. The US unemployment rate fell marginally to 9.1% but remains historically high.

Today’s jobs figures will likely ease investors’ immediate concerns over a severe drop in US economic activity in the third quarter but it is unlikely to do much to alter the view that the US is experiencing a slowdown in growth.

Next week could be crucial for stock markets
Next week could mark a crucial week for the FTSE 100 and global stock markets. Much of the moves seen this week have been driven by adrenaline, fear and investors’ defensive instincts. The FTSE 100 found support at the 5200 level today, but a bearish start to next week could see this under immediate threat and a potential return to the 5000 level. A confirmed break however of 4770 in the medium term could pose a serious threat for the rest of the year’s performance.

That said, there is every chance we could see a bounce based on investors bargain hunting at the start of next week, though it will be important for investors to assess whether any small recovery in share prices is a ‘dead cat bounce’ or a more definitive recovery. Stock markets have lost strongly this week and it is likely that investors will want to see Indices gain around 6-8% before any degrees of confidence can start to be established.