European shares fall as German growth disappoints

LONDON: European shares fell on Tuesday, after Germany posted much weaker growth than expected and as investors lost confidence that a meeting to discuss the euro zone sovereign debt crisis would bring significant change.

German GDP growth slowed more than expected in the second quarter, dropping to 0.1 percent in seasonally adjusted terms from a revised 1.3 percent in the first three months of the year.

Germany's DAX led the losers among the bigger markets, shedding 2.3 percent.

Fallers included truckmaker MAN and automaker BMW, down 5.3 and 3.1 percent respectively, and engineering conglomerate Siemens, off 2.4 percent.

"The largest economy in Europe stagnating is clearly not helpful for equities," said Ian King, head of international equities at Legal & General, which has 356 billion pounds ($584 billion) under management.

At 1034 GMT, the FTSEurofirst 300 index of top European shares was down 1.1 percent at 958.40 points. The index is down more than 19 percent from 2011's peak in mid-February, and hit a two-year low last week.

Investors have cut exposure to risky assets such as stocks after an escalation of the euro zone debt crisis, the US losing its triple-A credit rating and weak data from major economies that sparked concern they may slip back into recession.

French President Nicolas Sarkozy and German Chancellor Angela Merkel meet in Paris later to discuss what further measures they can take to contain Europe's debt crisis, which is now spreading to the continent's core.

The leaders face a stark choice over whether to begin steering the embattled euro zone towards closer fiscal union or risk watching the bloc unravel.

With Germany remaining opposed to a joint euro zone bond, some strategists say any upside from the talks will be limited.

"There is some scepticism over whether we will see anything meaningful out of that," King said.

ATTRACTIVE

Equity valuations on Thomson Reuters Datastream showed the STOXX Europe 600 carrying a one-year forward price-to-earnings of 9.6, against a 10-year average of more than 13.

But even this might not tempt investors back into equities.

"Valuations looking cheap is all well and good, but the confidence in future earnings is very low. And low confidence means fragile markets," King said.

The wider euro zone picture was also gloomy. The euro zone economy grew less than forecast in the second quarter, held back by sluggish performance in Germany and France stagnating.

The Eurostat agency estimated GDP for the 17-country euro zone increased 0.2 percent in the three months to end-June from the previous quarter, compared with economists' forecasts for 0.3 percent.

Around Europe, UK's FTSE 100 index was down 0.7 percent and France's CAC 40 was 1.5 percent lower. Spain's IBEX and Italy's FTSE MIB were down 1.7 and 2.2 percent respectively.

European banking stocks , many of which are exposed to the euro zone crisis, fell 1.2 percent. The sector is down more than 25 percent in 2011.

Societe Generale fell 0.9 percent and Deutsche Bank was down 2.2 percent.

But Spain's chunky sale of short-term debt went smoothly on Tuesday after bond buying by the European Central Bank, as it tries to stop the crisis spreading.

Italian banks rose, helped by the ECB also buying Italian bonds. Intesa SanPaolo rose 1 percent, Mediobanca added 2.5 percent.

But shares in Italian utilities sagged after the government raised its so-called Robin Hood tax on the energy sector over the weekend, and extended its scope as part of an emergency 45 billion euros ($65 billion) austerity plan.

Gas grid operator Snam Rete Gas and electricity grid operator Terna fell 11.5 and 10.1 percent respectively.

According to BofA Merrill Lynch's monthly fund management survey, European investor sentiment has sharply fallen, with the readings of economic growth and corporate earnings outlook dropping to levels not seen since March 2009.

"While this mirrors moves in other regions -- notably the US -- sentiment in Europe is now much the worst of any region and this looks overdone, potentially setting the stage for an equity rebound, particularly viewed together with the high cash levels seen in the global survey, which have triggered our contrarian buy rule," Merrill Lynch wrote in a note.

Copyright Reuters, 2011