French banks lead European shares lower

LONDON: European shares dipped early on Wednesday after euro zone ministers failed to agree on how to share the costs of a new bailout for Greece and with French banks placed under review for a downgrade by Moody's.

BNP Paribas Societe Generale and Credit Agricole fell between 1.6 and 1.9 percent after Moody's Investors Service put them on review for a possible downgrade, citing the banks' exposure to Greece's debt crisis.

At 0858 GMT, the FTSEurofirst 300 index of top European shares was down 0.3 percent at 1,097.90 points, after rising 0.8 percent in the previous session, buoyed by Chinese data that boosted sentiment on the strength of the global economic recovery.

But the index has lost 3.9 percent in June, on worries about euro zone debt and weak US economic data.

"At some stage they (EU politicians) are going to have to grasp the nettle.

A lot of that is dependent on the banks being strong enough to take the hit," said Justin Urquhart Stewart, director at Seven Investment Management. "The euro is damaged the people operating it don't want to change it."

"There may be further weakness for shares. We've seen the best of the corporates now, although they may be boosted by further mergers and acquisitions activity, because companies are sitting on a lot of cash at the moment."

Euro zone ministers failed on Tuesday to reach agreement on how private holders of Greek debt should share the costs of a new bailout, putting the onus on the leaders of Germany and France to forge a deal later this week.Greek banks fell 5.7 percent.The STOXX Europe 600 Banking Index fell 1.2 percent.

Adding further to banks' worries, British Finance Minister George Osborne will use a speech on Wednesday to throw his weight behind recommendations that banks' retail arms should be ring-fenced from their investment banking operations, Treasury sources said.

Barclays and Royal Bank of Scotland fell between 1.1 and 1.7 percent. "There's a lot of uncertainty for banks, about what is the required capital, what is the ringfencing.

And then the irony of the German financial regulator saying he doesn't want the stress tests to be too tough make up your mind," said Philip Isherwood, European equities strategist at Evolution Securities. "The easiest way for markets to deal with uncertainty is to go down."

He said short-term weakness for shares might persist.

Miners gained, though copper prices gave back a little of their 2.9 percent surge on Tuesday, the biggest gain in nearly a month.

BHP Billiton and Rio Tinto rose 0.6 and 0.7 percent respectively. Among individual shares, Swedish budget fashion retailer H&M fell 3 percent after the firm posted a weaker-than-expected 2 percent rise in May sales at established stores.

The recent weakness in markets has prompted some strategists to highlight how cheap they look.Equity valuations on Thomson Reuters Datastream showed the STOXX Europe 600 carrying a one-year forward price-to-earnings of about 10.3 against a 10-year average of 13.4.

Copyright Reuters, 2011