European shares fall

LONDON: European shares drifted lower on Friday, as investors awaited the results of EU-wide banking stress tests that may show some smaller players needing to raise capital as the euro zone debt crisis takes its toll on balance sheets.

At 1122 GMT the FTS-Eurofirst 300 index of top European shares was down 0.3 percent at 1,086.11 points, after falling 0.9 percent in the previous session. The index is down 2.5 percent this week, the sharpest decline since mid-March.

Miners fell as copper and other metals prices failed to recover from a decline in the previous session, on worries about the demand outlook. The Stoxx Europe 600 Basic Resources Index fell 1.1 percent, and is down more than 11 percent in 2011.

Top global miner BHP Billiton fell 2 percent after saying it would buy US gas producer Petrohawk Energy Corp for $12.1 billion, increasing its bets on the booming but environmentally controversial shale gas industry.

A health check of European banks, with results due to be published at 1600 GMT, is expected to show that as many as 15 lenders need more capital to withstand a prolonged recession, with criticism growing that the tests do not encompass the impact of a Greek sovereign debt default.

The STOXX Europe 600 banking sector index fell 0.2 percent, and is down more than 11 percent in 2011.

"It's the calm before the storm. It's all eyes on the stress tests. There's going to be a lot of number crunching over the weekend," said Andrew Milligan, head of global strategy, at Standard Life Investments.

"I've got one conference call with banking analysts on Sunday evening I can dial into, and another one on Monday morning."

The auto sector, up 0.6 percent, helped to limit the losses for key indexes. The sector is up more than 11 percent in 2011.

Volkswagen AG, the world's third-largest carmaker, reported a sharp rise in sales and Daimler AG arranged for extra shifts in a further sign they could be the main beneficiaries of soaring demand in Asia. Goldman Sachs raised its target prices for several automakers including BMW, which rose 1.3 percent.

Milligan said Standard Life was still underweight European shares, but said there could be a bounce if there was a greater focus on earnings and debt issues on both sides of the Atlantic were addressed.

"It's early days (in the second-quarter company results reporting season) but if JPMorgan's results feed through to the other US banks that would be very positive indeed," he said. Nevertheless investors remained anxious over the euro zone debt crisis.

"Markets are increasingly concerned about the lack of unity among European politicians in the face of the worsening sovereign debt crisis," Deutsche Bank said in a note. "The failure of the various measures taken so far to build confidence among investors has already pushed up the equity risk premium (ERP), on our calculations.

It added: "We believe that a continuation of this trend is the primary risk that could see world stocks (the MSCI World index) lose up to 35 percent of their value if the situation deteriorates into a full-blown financial crisis on the scale of the fallout from the collapse of Lehman Brothers in 2008."

Meanwhile the United States, the world's biggest economy, has its own debt crisis.

President Barack Obama suspended US budget negotiations for the day Friday to give congressional leaders a chance to come up with a "plan of action" on how to unblock talks meant to cut deficits and avert a debt default.

Standard & Poor's said there was a one-in-two chance it would cut the United States' AAA rating if a deal on raising the debt ceiling was not agreed soon. Moody's has also placed the United States on review for downgrade.

The Euro STOXX 50, the euro zone's blue-chip index fell 0.5 percent to 2,682.52. The index has been underperforming other leading equity indexes and its latest weakness has taken the index through March and June lows around 2,717.

Bill McNamara, technical analyst at Charles Stanley, said a test of the November lows at around 2,635 looked like a realistic possibility.

"Such price action can hardly be described as bullish and the break down through the medium-term uptrend, which took place last month, has been followed by further weakness, confirming that the bull market for the index is over," he said.

Among individual shares, Petroleum Geo Services, the Norwegian oil surveyor, soared 8.9 percent after saying it earned more in the second quarter than most analysts were expecting, with operating profit in excess of $40 million.

SGS fell 7.9 percent after the world's largest inspection services companies said its 2011 operating margin would be hit by higher investments in the second half after the strong Swiss franc weighed on its first-half results.

Copyright Reuters, 2011