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European shares headed for steep weekly decline

Stock MarketsJul 15, 2011 05:12AM ET
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* FTSEurofirst 300 set for biggest weekly drop since March

* Financials retreat ahead of bank stress test results

* Risk appetite falls; technical outlook bearish

By Atul Prakash

LONDON, July 15 (Reuters) - European shares were headed for their biggest weekly fall in four months on Friday, with miners tracking weaker metals and financials coming under pressure ahead of a bank stress test report expected to show some second-tier lenders have failed.

Persistent concerns about debt crises in euro zone and the United States prompted investors to stay away from riskier assets, with warnings from credit rating agencies of a possible U.S. downgrade making investors nervous.

The Euro STOXX 50 volatility index , one of Europe's main barometers of sentiment, rose 6 percent, indicating a drop in investor desire to buy assets such as equities.

The FTSEurofirst 300 index of top European shares was down 0.4 percent at 1,084.64 points at 0841 GMT, after falling 0.9 percent in the previous session. The index is down 2.7 percent this week, the sharpest decline since mid-March.

European insurers fell 1.2 percent, the Thomson Reuters Peripheral Eurozone Banks index was down 0.6 percent, while European banks dropped 0.7 percent. Commerzbank fell 2.6 percent.

"We have still got a cocktail of uncertainties for investors," said Keith Bowman, equity analyst at Hargreaves Lansdown.

"The situation in Europe is still very difficult to forecast. We had another warning over the U.S. credit position and on the top of all that we have got the bank stress test results to come later today."

The results of the stress test of 90 lenders were expected to show around 10 have insufficient capital to withstand a prolonged recession. No large bank was expected to fall short and total capital needed could be under 10 billion euros ($14 billion).

"Transparency will be increased and the market will differentiate more between the stronger banks and the ones which are more exposed," said Klaus Wiener, chief economist at Generali Investments, which manages 330 billion euros.

European technology shares also suffered a sharp sell-off. The sector index fell 1.4 percent, while Ericsson fell 1.3 percent on news Sony Ericsson, owned 50-50 by the Swedish company and Japanese group Sony , swung to a second-quarter loss.

Miners fell 1 percent.


The Euro STOXX 50 , the euro zone's blue-chip index fell 0.7 percent to 2,676.11. The index has been underperforming other leading equity indexes and its latest weakness has taken the index through March and June lows around 2,717.

Bill McNamara, technical analyst at Charles Stanley, said a test of the November lows at around 2,635 looked like a realistic possibility.

"Such price action can hardly be described as bullish and the break down through the medium-term uptrend, which took place last month, has been followed by further weakness, confirming that the bull market for the index is over," he said.

Analysts said slow progress in U.S. budget talks had been increasing investor anxiety.

U.S. President Barack Obama suspended negotiations for the day on Friday to give congressional leaders a chance to come up with a plan of action to unblock talks meant to cut deficits and avert a debt default.

Markets were concerned Republicans and Democrats were too far apart to reach a major budget agreement by Aug. 2, when the United States would run out of money unless the cap on government borrowing is raised.

"There is no doubt that they need to get their act together. Even a temporary default will not be advisable," Wiener said.

"But there is a fundamental difference between what we see in the United States and what we see in the euro area. In the U.S., we are talking about a debt ceiling which is self-imposed, whereas in the euro zone, the problem in some countries is that the capital market is not willing to give them any more money."

Standard & Poor's said there was a one-in-two chance it would cut the United States' AAA rating if a deal on raising the debt ceiling was not agreed soon. Moody's has also placed the United States on review for downgrade.

Investors kept a close eye on the eruo zone debt crisis. The lower house of Italy's parliament was expected to give final approval to an austerity plan worth 48 billion euros which the country is hoping will help soothe market fears it is being sucked into the euro zone debt crisis.

Among individual movers, SGS fell 5.6 percent after the world's largest inspection services company said its 2011 operating margin would be hit by higher investments in the second half after the strong Swiss franc weighed on its first-half results. (Editing by Dan Lalor)

============================================================ For rolling updates on what is moving European shares please click on ============================================================ For pan-Europeanmarket data and news, click on codes in brackets: European Equities speed guide................... FTSEurofirst 300 index.............................. STOXX Europe index.................................. Top 10 STOXX sectors........................... Top 10 EUROSTOXX sectors...................... Top 10 Eurofirst 300 sectors................... Top 25 European pct gainers....................... Top 25 European pct losers........................

Main stock markets: Dow Jones............... Wall Street report ..... Nikkei 225............. Tokyo report............ FTSE 100............... London report........... Xetra DAX............. CAC-40............... World Indices.....................................<0#.INDEX> Reuters survey of world bourse outlook......... Western European IPO diary......................... European Asset Allocation........................ Reuters News at a Glance: Equities................. Main currency report:................................. ($1 = 0.706 Euros)

European shares headed for steep weekly decline

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