European shares fall; downside seen limited

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European shares fell on Friday, led by growth-linked stocks, as recent poor macroeconomic data raised fresh concerns about the pace of global economic recovery, although analysts said the possibility of a steep sell-off in the near term was limited.

Miners, which generally suffer in a challenging economic environment, fell 1.3 percent as several reports suggested on Thursday that a slowdown in manufacturing growth worldwide threatened profit margins of companies. Oils fell 1.6 percent, while chemical stocks dropped 1.7 percent.

At 12:27 SA time, the FTSEurofirst 300 index of top European shares was down 0.4 percent at 1,005.14 points after falling 0.5 percent in the previous session on poor economic data from the United States, China and Europe on jobs, housing and manufacturing.

“Macro indicators show we are entering into a softer period for growth. We will continue to see a muddle through scenario where things are a little bit on the weaker side, but you also have some policy response and cheap valuations,” Asbjorn Trolle Hansen, head of muliti assets at Nordea Asset Management, said.

“We have scaled down our equity weightings over the last months and added long-term German bonds. We are very close to 'neutral' on equities from strong 'overweight' at the beginning of the year, but still see some value in the equity market.”

The STOXX Europe 600 index trades at a 9.5 times its one year forward earnings, against a 10-year average of 12.5 and 11.8 times for the US S&P 500 index, according to Thomson Reuters Datastream.

Hansen said he would like to see an end to negative earnings revisions by analysts before considering becoming overweight in equities again.

Analysts said there was a need to have a balanced portfolio as further deterioration in the economic outlook and the euro zone debt situation would induce politicians and central banks to take appropriate action to stimulate growth.

Koen De Leus, strategist at KBC Securities, in Brussels, said the market had already factored in a lot of risk, so the possibility of equities collapsing was limited, but the market could easily fall as much as 5 percent in the coming weeks if European politicians dithered and failed to take some bold steps to resolve the debt crisis.

“But being too short is risky as central banks have said that they are ready to intervene if the situation deteriorates further. The best strategy could be to stay neutral, as being long also doesn't seem to be a good move in the current environment.”

The leaders of Germany, France, Italy and Spain will try to find common ground in Rome on Friday to restore confidence in the euro zone ahead of a full EU summit next week. High borrowing costs for Spain and Italy have eased on hopes for policy initiatives at the summit on June 28/29.

BANKS OUTPERFORM

Banks, however, bucked the trend, with the euro zone banking index rising 1.2 percent, led by Spanish banks after independent audits showed on Thursday Spain's banks will need up to 62 billion euros in capital needs under stressed economic conditions, lower than the 100 billion euro bailout fund Spain would receive to address its banking crisis.

Bankinter rose 3.6 percent, BBVA was up 1.8 percent and Banco de Valencia rose 3.7 percent. Spain's IBEX share index was up 1.2 percent, outperforming the wider market.

The blue chip Euro STOXX 50 index fell 0.1 percent to 2,196.43 points. Charts showed the index might struggle around the resistance area between a horizontal line at 2,200 and the 50-day moving average at 2,206.

“I believe we need some further downside in the next few days, possibly towards 2,110, from where we could see another short-term rally phase,” Roelof-Jan van den Akker, senior technical analyst at ING Commercial Banking, said.

“But the upside potential will be limited. The prices will not succeed in the next rally phase to break the 2,200-2,250 resistance area. Markets in general are building the next short-term lower top phase within a longer-term bear market.”

Among individual movers, Holcim fell 2.3 percent after its Indian subsidiaries ACC and Ambuja Cements were slapped with a 390 million Swiss franc fine for price-fixing. - Reuters