European shares retreat

European shares went into reverse on Wednesday, led by heavy falls for both Spanish and Italian indexes, with bank stocks hit by investor worries over a Spanish debt auction on Thursday. The FTSEurofirst 300 index of top European shares closed down 0.7 percent at 1,046.18 points, having jumped 2 percent on Tuesday.
European banking stocks, strong gainers in the previous session, dropped 2.1 percent, while Spanish and Italian bond yields unwound some of their early falls as markets focused on Spain's debt auction.
"If you really want to know what investors are currently thinking, then move away from looking at equities, and turn your attention to government bond markets. These are showing quite clearly that fear is returning," Louise Cooper, market analyst at BGC Partners, said.
Madrid's IBEX 35 was the biggest laggard, off 4 percent, after data showing Spanish banks' bad loans rose to their highest since October 1994 in February, to 8.2 percent of their credit portfolios.
Sentiment was also dealt a blow when European Central Bank policymaker Jens Weidmann said Spain should take a rise in its bond yields as a spur to tackle the root causes of its debt woes and not look to the ECB to help by buying its bonds.
Spanish building company ACS was a big faller on Wednesday, off 6.1 percent, after saying its sale of a 3.7 percent stake in utility Iberdrola would hit this year's earnings by 540 million euros ($709.6 million). That pushed construction and materials shares down 2.2 percent.
Analysts remain fairly upbeat on the medium-term prospects for global equities. Merrill Lynch Wealth Management highlighted a slowdown in the pace of earnings downgrades relative to upgrades - which in the past proved supportive.
Merrill does not forecast the second quarter to be as strong for equities as the last - aided by improving US economic indicators and liquidity by global central banks - but it still sees medium-term value.
Whilst the euro zone sovereign debt crisis will continue to take its toll, it could also trigger more policy action.
"Overall we remain moderately constructive on risky assets (but) it will not be a splendid year - it's still a low-growth environment," said Stefan Hofrichter, chief economist at Allianz Global Investors which is responsible for more than 270 billion euros ($355 billion) in assets.
"Going forward I think we can probably rely on central banks to help avoid an extreme risk scenario."
Miners helped limit losses in European stocks, with BHP Billiton advancing 0.9 percent after a reassuring third-quarter production report from the global group, which prompted Barclays Capital to repeat its "overweight" stance on the stock.
"Overall a decent set of figures with the company delivering broadly in line with our modelling for the key divisions and reiterating guidance in iron ore, petroleum and copper which together make up 89 percent of financial year 2012 EBIT," BarCap said in a note.
Kazakhmys bucked the trend, shedding 4.1 percent as ING downgraded its recommendation on the copper miner to "sell" on concerns over higher costs, lower volumes and further capex increases among copper miners.