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European shares flat as miners rise, banks fall

Published 03/29/2011, 01:32 PM
Updated 03/29/2011, 01:36 PM

* FTSEurofirst 300 closes flat

* Miners rise as aluminium prices hit 2-1/2 year high

* UBI Banca falls on capital hike; peripheral banks lower

* S&P downgrades Portugal and Greece

By Brian Gorman

LONDON, March 29 (Reuters) - European shares closed flat on Tuesday, with Italian lender UBI Banca leading banks lower after a capital hike, but with miners higher as aluminium prices hit their highest since 2008 on Middle East unrest.

The pan-European FTSEurofirst 300 index closed up 0.04 percent at 1,125.94 points, its highest close since March 10, and up for eight sessions out of nine, though some of the gains have been marginal. Volumes matched the 90-day average. UBI Banca shed 12.4 percent as its 1 billion-euro capital increase took investors by surprise and prompted speculation that other banks could be heading down the same route.

Intesa SanPaolo and UniCredit fell 4.5 and 3.7 percent respectively.

"Banks, especially European banks, are going to have to raise significant volumes of capital. They will continue to underperform," said Bob Parker, senior adviser at Credit Suisse, who is "underweight" on the sector.

Miners rose as aluminium on the London Metal Exchange hit the highest since September 2008 as Middle East unrest fuelled expectations of rising costs for the power-intensive metal. Copper prices recovered late in the day, having been down earlier on concerns about Chinese demand.

Heavyweights in the sector to rise included Anglo American, BHP Billiton and Rio Tinto, up between 2 and 2.2 percent.

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Vedanta rose 2.9 percent following recent upbeat broker comment surrounding its pending purchase of oil and gas firm Cairn India, which analysts say could be 30 percent earnings accretive.

But BP fell 2.2 percent after a rating downgrade by Collins Stewart and on reports that the company may face manslaughter charges over its Gulf of Mexico spill.

EUROZONE DEBT

Standard & Poor's cut its foreign currency credit rating on Portugal by one notch to BBB-minus, citing the potential for the debt-strapped nation's need to subordinate its debt in order to borrow from the European Union. Portugal's rating, now one level above junk status has a negative outlook, said S&P, which also cut Greece's ratings.

However, analysts said equities might resume a recent rally as bigger economies such as Spain were not seen as being in immediate danger of needing a bailout, and some stocks still looked cheap.

"The good news is that Spanish (debt) spreads have come in quite significantly - back under 200 basis points compared with Germany," Parker said. "The action taken in Spain has impressed the market."

He said equities could rise between 5 and 10 percent by the year-end and that he was overweight on telecoms, energy, and capital goods as "fairly defensive high dividend sectors". Spanish bond spreads are expected to continue to narrow against benchmark German bunds and show that Spain is a different case to other peripheral euro zone countries, Treasury Secretary Carlos Ocana said on Tuesday.

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Across Europe, Britain's FTSE 100 and France's CAC40 rose 0.5 and 0.3 percent respectively. Germany's DAX fell 0.1 percent.

Italy's FTSE MIB and Ireland's ISEQ both fell 1 percent; Portugal's benchmark and Spain's IBEX both fell 0.2 percent.

"France and Italy are highly correlated to the sovereign debt risk-fear trade, but I don't think they should be," UBS strategist Karen Olney said, defining them, rather, as the "lower-risk-periphery" trade.

That lack of differentiation gave scope to buy on dips in both countries, she added, with sectors such as Italian banks, capital goods, transport and utilities all trading at material sector price-earnings discounts to the broader European market.

U.S. DATA

Investors await confirmation of improving economic fundamentals from key data such as the U.S. non farm payrolls due later in the week.

Brightening prospects for the U.S. economy has fuelled expectations that the Federal Reserve could bring forward monetary tightening, with Fed member James Bullard saying that waiting too long to tighten policy could produce "a lot of inflation." (Additional Reporting by Simon Jessop; Editing by Greg Mahlich)

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