European shares down on Moody's move, banks slip

Tue Nov 20, 2012 6:10pm IST

* FTSEurofirst 300 down 0.1 pct, FTSE MIB falls 0.6 pct

* French shares down on Moody's downgrade

* Fiat falls 4.9 percent on UBS rating cut

By Atul Prakash

LONDON, Nov 20 (Reuters) - European shares ticked lower on Tuesday, with French and Italian stocks underperforming after Moody's cut France's credit rating and said Italy's banking outlook remained negative, although losses were seen limited.

Italy's FTSE MIB fell 0.6 percent to lead weaker regional stock indexes, pressured by financials, after Moody's Moody's said the operating conditions for Italian banks were difficult and would remain challenging.

The comments came after sources said the Bank of Italy had told domestic lenders to make adequate provisions for rising bad loans, resulting in a 1.6-2.9 percent fall in Banco Popolare , UniCredit and BP Milano.

Investors also registered a knee-jerk reaction to Moody's downgrade of France, the euro zone's second-biggest economy. France's CAC 40 share index fell 0.2 percent, while EDF , Bouygues and France Telecom fell 0.9 to 2 percent.

"Fundamental problems of the euro zone have not gone away and there is no clear sign of a resolution. Until we get some clear strategy, there are going to be ongoing problems," said Oliver Wallin, investment director at Octopus Investments, which manages nearly $5 billion.

"The weakest links in the chain are clearly Spain, Italy, Greece, Cyprus and Portugal. At the moment, you can't disconnect the banking sector from sovereign problems."

While France's downgrade had been expected and was largely priced-in, analysts said the previous session's big gains - when the FTSEurofirst 300 posted its biggest daily rise in 10 weeks - meant some were using it as a reason to take profits.

At 1214 GMT, the FTSEurofirst 300 was down 0.1 percent at 1,089.48 points after surging 2.3 percent on Monday. The euro zone's blue chip Euro STOXX 50 index was down 0.1 percent at 2,492.31 points.

Technical analysts said that the Euro STOXX 50 was expected to continue trading within its recent range of 2,426-2,581.

"Since peaking at 2,594 two months ago, the index has recorded a sequence of descending tops and one would want to see it back above its 50-day moving average, now at 2,512, before suggesting the bottom is in," Bill McNamara, technical analyst at Charles Stanley, said.

CYCLICALS RETREAT

Cyclical shares, which generally react more to changes in economic conditions, suffered the most, with the STOXX Europe 600 Banking index down 1.1 percent and the construction sector 0.2 percent lower, retreating after Monday's spike of 3.6 percent and 3 percent respectively.

Italian carmaker Fiat, down 4.9 percent, topped the decliners' list on a wider sell-off after UBS cut its rating on the stock to "neutral" from "buy".

Some analysts said that European shares had potential to move higher in the coming sessions on expectations that U.S. politicians would make progress in talks to avoid the so-called "fiscal cliff" - $600 billion of tax rises and spending cuts scheduled for early next year which threaten to tip the world's biggest economy back into recession.

Investors also expected a positive outcome from a meeting of the euro zone finance ministers on the release of bailout funds to debt-ridden Greece, which approved laws on Monday to enforce budget targets and ensure privatisation proceeds are used to pay off debt.

"We expect that by the year end, we will recover some of the losses we made over the last month and start the new year broadly in a positive trajectory," said Graham Bishop, senior equity strategist at Exane BNP Paribas.

"We like industrials, media, business services and banks, but don't like sectors such as food and beverages and luxury goods."

On the positive side, travel and leisure shares topped the gainers' list, helped by a 5.6 percent rise in easyJet, which doubled its dividend after annual results.

"I'm still of the belief that on the back of a Greek and 'fiscal cliff' deal, we'll get a 5-10 percent rally in equities. The question is how far do we fall before this rally happens," Mike Jarman, chief market strategist at H2O Markets, said.

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