European Markets Look To Shrug Off Summer Malaise

Terry Flanagan

Low volumes and structural changes continue to subdue European equity markets, despite the recent share rally, as a general lack of liquidity lingers—although some traders are hopeful that potential progress over the eurozone debt crisis may prove to be a light at the end of this seemingly never-ending tunnel.

Recent job cuts in Europe by Deutsche Bank, Germany’s biggest lender, and Japanese brokerage Nomura have added to the air of unease in financial markets across the region and with regulatory changes either looming or being enacted now that threaten to shackle markets still further, some market participants are worried that volumes may never return to the levels seen before the onset of the financial crisis in 2007.

“A quiet July and August is not that untypical apart from last year when the U.S. credit rating was downgraded,” Paul Squires, head of trading at Axa Investment Managers, told Markets Media.

“August is usually a very quiet month for the markets but the continued [downward] trend has most impacted equities. We are starting to see quite a lot of structural change rather than just seasonal effects coming through in the industry.

“It is hard to unravel the different causes: the European sovereign debt crisis, impending regulation changes, the financial transaction tax in France and other countries from changes to high-frequency trading and from all the rest of it—but the real impact is in the equity world.

“You saw that with the Nomura announcement last week—a bigger change to their equity model than anticipated. We also saw a few of the other bigger brokers, such as Deutsche, cutting headcount on the equity side again. So things are pretty tough right now due to lower volumes.”

Benoit Savoret, joint head of global equities at Nomura, added: “Equity markets are being dramatically reshaped globally as a result of the current environment.”

According to figures from financial data vendor Thomson Reuters, equities traded across Europe slumped to €616 billion last month, which was a 12% drop on July and 50% down from August last year, although the volatility resulting from the U.S. debt downgrade contributed to that higher figure. Last month’s figures were also the lowest since December 2009, when trading slipped to €592 billion.

“It is an environment that’s challenging for all investors globally,” said Sarah Alexander, founding president and chief executive of the Emerging Market Private Equity Association, a U.S.-based trade body.

Transatlantic exchange operator NYSE Euronext, which runs European venues in Belgium, France, the Netherlands and Portugal, also saw cash equities trading volumes fall significantly during August.

“Trading volumes in August 2012 declined year-over-year and month-over-month due to a decrease in volatility compared to August 2011 and the seasonally slower summer period,” it said in a statement earlier this week. “In August 2011, trading volumes benefited from extreme market volatility in the U.S. and Europe.”

However, with traders now returned to their desks following their summer vacations, there is some optimism that volumes could pick up in European equity markets after Mario Draghi, the head of the European Central Bank, appears to be making reasonable progress in his one-man mission to hold the eurozone together with his bond-buying program.

According to Bats Chi-X Europe, a pan-European multilateral trading facility, European equity trading volumes reached a 2012 peak on September 7 with just over €44 billion worth of stocks traded.

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