London surge helps keep European shares positive

LONDON: A surge in British equities helped keep European shares positive on Tuesday, as major euro zone markets fell, after key indicators of economic activity came in below expectations, adding to worries that the region could go into recession.

Euro zone economic sentiment deteriorated more than expected in August, data showed on Tuesday, underlining the prospect of a further slowdown in economic growth in the second half of the year.

Germany's DAX fell 0.8 percent and France's CAC fell 0.3 percent.

The sentiment indexes "were key" in the market's fall, said Richard Batty, strategist at Standard Life Investments, part of the Standard Life Group, which administers 196.8 billion pounds ($323 billion) of assets.

"Europe can't afford to see a soft patch like this. The US data has been surprising less negatively.

"The earnings revision cycle has turned negative. There is also concern you don't have the tailwind of the weaker euro."

Britain's FTSE was up 2.2 percent, catching up with strong gains in other parts of Europe in the previous session, when UK markets were closed for a holiday. This helped keep a key benchmark of European equities positive.

At 1052 GMT, the FTSEurofirst 300 index of top European shares was up 0.7 percent at 937.57 points.

The index has lost more than 16 percent of its value this year. Investors have cut their exposure to risky assets such as stocks following an escalation of the euro zone debt crisis, the United States losing its triple-A credit rating and weak economic data from major economies that have sparked concern they may go back into recession.

Italy's FTMIB fell 0.8 percent. Italy's economic growth could be weaker than 1 percent in 2011 and even weaker in 2012, which could hold back efforts to balance the budget and cut its massive debt, a senior Bank of Italy official said.

Italy sold 7.74 billion euros of three-, seven- and 10-year government bonds on Tuesday, in its first bond sale since the European Central Bank began buying its debt to help stabilise the country's debt markets.

Analysts said the auctions were slightly weak, which shows that the ECB must continue to buy bonds on the market to support it.

Heavyweight banks Intesa SanPaolo and UniCredit fell 2.3 and 1.2 percent respectively. The banks have lost around 30 percent of their value in the last month.

Banca Popolare dell Emilia Romagna Societa cooperativa fell 2.9 percent after Exane BNP Paribas downgraded it to "underperform" on valuation grounds.

But Royal Bank of Scotland surged 7.7 percent, helped by an upgrade in rating for the part-nationalised lender to "buy" from "hold" by Deutsche Bank, which thinks British banks' share prices are discounting the worst, and sector valuations will prove attractive in hindsight.

Others to gain included Lloyds Banking Group , Barclays and global heavyweight HSBC , up between 3.6 and 6 percent.

US data on Monday, notably in consumer spending, boosted confidence the world's biggest economy was not headed for a recession.

Cyclical stocks to gain on Tuesday, included London-listed mining stocks, such as Rio Tinto, up 3.6 percent.

VALUATIONS

Although not upbeat on the prospects for European equities Batty said valuations were attractive.

"Valuations are helpful, and people are seeing yields move above bond yields and that can be a useful signal," he said.

"The market's drop over the past two months has created a number of interesting entry points," said David Thebault, head of quantitative sales trading, at Paris-based broker Global Equities.

"Luxury stocks, which were quite expensive at the beginning of the summer, are now attractive again while the fundamentals of the sector are intact."

Hermes was up 1.9 percent, Richemont up 1.2 percent

Investors awaited a slew of key US data this week, including consumer confidence, the ADP jobs report, ISM manufacturing and the non-farm payrolls report.

"The non-farm payrolls could be a swing indicator for markets," Batty said.

The market will also keep an eye on minutes from the US Federal Reserve's last committee meeting on Aug. 9, due on Tuesday, which could offer insight on divisions among board members over further stimulus measures.

The euro zone's blue chip Euro STOXX 50 index fell 0.5 percent to 2,228.96 points, below a key resistance level.

The index's chart has formed a triangle pattern over the past few weeks and the exit of the triangle, especially if volumes are strong, should send the index testing either the top or the bottom of the triangle, respectively at 2,450 points and 2,077 points, said Alexandre Le Drogoff, technical analyst at Aurel BGC, in Paris.

"But despite the potential impulse triggered when the index exits the triangle, it should stay range-bound after that, just like it did in the first half of 2008, waiting for the 50-day and 200-day moving averages to get reunited with prices," he said.

"On a three- to six-month horizon, we have a negative opinion for the index. A new pull-back could send the index to fresh year-lows.

Copyright Reuters, 2011