U.S. budget posturing drags European shares lower

Fri Dec 21, 2012 5:15pm IST

* FTSEurofirst 300 down 0.6 percent

* U.S. fiscal risk drag indexes off multi-month highs

* ADP tumbles on profit warning

* UK banks lead sector lower on regulatory worries

By David Brett

LONDON, Dec 21 (Reuters) - European shares took a knock on Friday as the prospect of the United States stumbling over its "fiscal cliff" of growth-sapping tax hikes and spending cuts loomed larger after the Republicans' "Plan B" fell flat.

Republican lawmakers delivered a stinging rebuke to their leader and failed to back an effort, known as "Plan B", designed to extract concessions from President Barack Obama in year-end "fiscal cliff" talks.

"The political posturing in the U.S. is likely to continue," said Nick Xanders, head of European equity strategy at brokerage BTIG. "Markets seem complacent and we have seen a number of companies giving downgrades for 2013 in recent weeks and yet equity indexes continue to rally."

The FTSEurofirst 300 fell 7.04 points, or 0.6 percent, to 1,135.76 by 1123 GMT, having rallied fiercely since June.

Xanders said the U.S. budget delays could dent market momentum at the start of 2013.

"Expectations look too high, the polls are showing everyone is expecting a good start to 2013 and there is a big risk of disappointment," he said.

Despite some jitters, the market has largely traded on the assumption that a U.S. budget deal would eventually be struck. European shares have risen more than 20 percent since June as central banks have stepped in to backstop the global economy.

A recent Reuters poll saw the euro zone's blue-chip Euro STOXX 50 index rising 10 percent to end-2013.

But in response to an impasse in the U.S. budget talks the Euro STOXX 50 Volatility Index, or VSTOXX, Europe's widely-used measure of investor risk aversion, jumped 12.5 percent to a two-week high of 17.7.

Wall Street futures indicated sharp falls ahead when the stock exchange opens later on Friday.

In Europe, the steepest falls were reserved for Basic resource stocks, which were down 1.6 percent having rallied 8.4 percent so far this month.

"Risk assets look vulnerable over the holiday trading period. The recent performance of key benchmarks has priced in a satisfactory outcome to the U.S. fiscal discussions, which is far from a done deal," Peel Hunt strategist Ian Williams said.

EARNINGS CONCERNS

Aeroports de Paris, operator of the French capital's Charles de Gaulle and Orly airports, was the biggest individual faller, down 5.9 percent after it cut its medium-term earnings targets.

Earnings forecasts look too high for the coming year with analysts estimating company earnings in developed Europe will grow by around 13 percent in 2013, according to Thomson Reuters Starmine data.

"Those expectations have to come down and potentially quite a bit if the U.S. does not resolve its fiscal issues, and if that scenarios plays out those sectors on ramped-up earnings multiples could feel the pain," a London-based trader, who declined to be named, said.

Banks, whose 12-month forward price-to-earnings (PE) have rerated to post-credit crisis of around 12 times, shed 1.7 percent.

Heavyweight UK banks including Barclays, down 2.3 percent, and Royal Bank of Scotland, off 2 percent, fell after a UK parliamentary report warned the sector may need tougher regulation following the global financial crisis.

The technology sector, which trades on a PE of 19.2 times and with its 14-day relative strength index (RSI) - a widely-used technical momentum indicator - in 'overbought' territory, fell 1 percent.

Infineon Technologies, however, outperformed the sector, rising 0.8 percent after JP Morgan upgraded the stock to "overweight" from "neutral".

UK Water companies were the main gainers following modified license proposals from regulator Ofwat with United Utilities up 1.3 percent as investors welcomed significant changes which Ofwat has made relating in particular to the next price review process in 2014.

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