* FTSEurofirst closes down 0.1 percent
* Cyprus deal possible within hours
* Investors sceptical, defensives lead risers
* Banks remain under pressure, debt costs rising
By David Brett
LONDON, March 22 European shares ended only
marginally lower on Friday as investors largely expected a deal
would be struck to bail out deeply-indebted Cyprus and prevent
an escalation of the euro zone debt crisis.
The FTSEurofirst 300 closed down 1.28 points, or
0.1 percent at 1,189.44, while the euro zone blue chip index
was flat at 2,681.67, although all major European
indexes ended the week in negative territory.
"It has been a bumpy week but indices are still absorbing
bad news relatively easily," Dominic Hawker, analyst at Messels,
An announcement late on Friday by the deputy leader of
Cyprus's ruling Democratic Rally party that a solution to the
island's bailout crisis within the framework set down by the
European Union may be possible within "the next few hours",
helped stabilise indexes.
Bank of America Merrill Lynch remained optimistic a deal for
Cyprus would be reached and expected the Euro STOXX 50 to
rebound back towards 2,750 points, but scepticism remained among
"The cynic in me says the market is building itself up for
disappointment, as any potential deal would then have to be
approved by troika (the EU, the ECB and IMF)," a London-based
Cyprus needs to find 5.8 billion euros ($7.5 billion) in new
money by a Monday deadline to clinch a European Union bailout,
having earlier rejected a plan to raise the funds by taxing bank
customers' deposits. If it cannot do so, it risks a collapse of
its financial system that could push it out of the euro zone.
Mike Turner, European equity options broker at XBZ Ltd, said
clients had been buying protection against potential market
falls, should Cyprus disappoint markets over the weekend and
fail to come to an agreement.
He said investors had been buying "puts" - which give the
right to sell an index in the future - on the Euro STOXX 50 due
to expire next week with strike prices ranging from 2,600 to
2,500 points - implying that some saw a possible 7 percent fall
on the Euro STOXX 50 over the course of next week.
While equity markets appeared to take the threat from Cyprus
in their stride, other areas of the market were emitting signs
of stress as the risk to write downs for Europe's larger
creditors troubled for credit investors.
"Cyprus has had a deleterious impact on financial credit
costs ... The sharp rise in the CDS - the cost of insuring
against a default on a loan -- of German companies suggests that
a resolution to the current round of the euro crisis may require
more haircuts for creditors, or German taxpayers being forced to
pay up," Olive Tree Financial Group said in a note.
Over the past week, bank share prices have become
much more inversely correlated with CDS levels than at any time
in the past eight weeks.
Investors cautiousness was reflected in their choice of
asset purchases on Friday with mainly defensive stocks -
companies which offer goods and services consumers rely on even
in an austere economic climate - leading the gainers.
Utility firms rose 0.8 percent, with German power
provider E.ON up 1.2 percent, helped by Exane BNP
Paribas' upgrade to "neutral" on valuation grounds.
Telecoms, sought after for their 6 percent yield,
rose 0.6 percent, led by Telecom provider BT, up 3.9
percent, which had its target price hiked to 360 pence from 290
pence by Nomura.
"Regulatory rhetoric is turning positive for all of Europe's
network owners, but the benefits should prove more tangible for
fixed networks and highly significant for BT," the investment
bank, which also repeated its "buy" rating on valuation grounds,
said in a note.
Healthcare climbed 0.2 percent, led by AstraZeneca
which rose 3.3 percent as Natixis lifted its
recommendation on the drugmaker to "neutral" after the firm's
chief executive laid out his plans to turnaround the company on
The anomaly was the riskier oil and gas sector,
which climbed 0.4 percent, although the majority of those gains
were down to sector heavyweight BP.
The oil major rose 1.8 percent after it said it would return
$8 billion to shareholders, which helped cushion equity markets
from bigger losses.
And Italy's benchmark FTSEMIB rose 0.7 percent on
optimism the uncertainty over the leadership of the country,
currently in limbo, would soon be resolved.