European shares hit 2-wk low on U.S. fiscal concerns

Fri Nov 9, 2012 1:23pm GMT

* FTSEurofirst 300 index falls 1 percent

* Cyclicals lead sell-off; banks, miners down

* Novo Nordisk jumps after drug approval

By Atul Prakash

LONDON, Nov 9 (Reuters) - European shares extended losses on Friday, with a major index hitting a two-week low and growth-linked stocks falling on concerns the U.S fiscal crisis could threaten the world's biggest economy.

Adding to poor sentiment were worries about a weakening German economy and as Greece inched towards securing its next tranche of urgently needed international aid. The country will vote to approve its 2013 budget on Sunday, after Wednesday's tight vote in favour of a 13.5 billion euro austerity package.

"We have got the second Greek vote ahead of us, but there is potential for investors to focus more on the U.S. over the next few weeks. Clearly people are concerned about the 'fiscal cliff' and whether we will get a resolution that is acceptable to the market," Robert Parkes, strategist at HSBC Securities, said.

The United States faces a potential $600 billion in automatic spending cuts and tax rises next year, known as 'fiscal cliff', which could drive the country back into recession if no agreement is reached.

Near-term market concerns particularly hit sectors that usually derive strength from an improvement in global economic activities. European banks, down 2.7 percent, were the top decliners, while insurers dropped 2.5 percent and basic resources stocks fell 1.6 percent.

French bank Credit Agricole fell 8.9 percent after reporting a steeper-than-expected loss, hit by an exit from Greece and a series of other write-downs.

At 1306 GMT, the FTSEurofirst 300 index was down 1 percent at 1,087.28 points after falling as far as 1,086.69, the lowest since late October. The euro zone's blue chip Euro STOXX 50 index fell 1 percent to 2,454.36 points, to trade further below its 50-day moving average.

"As long as we are above the September lows of around 2,450, we are probably in a sideways consolidation phase. If the market breaks there, then the Euro STOXX 50 could move back to 2,350, which is the top of the April-June base formation," Dominic Hawker, technical analysts at Westhouse Securities, said.

Charts showed a very bearish candlestick formation earlier this week called a 'bearish engulfing' candlestick, or 'outside reversal' which usually signals a sudden reversal after a rally. The index hit a three-week high on Wednesday, before sharply retreating.

TRADING STRATEGY

James Butterfill, global equity strategist at Coutts, said concerns about the 'fiscal cliff' and the situation in Europe had been prompting investors to take some risk off the table. He saw a further downside potential in the short-term, but said that could also represent interesting buying opportunities.

"We are sticking to companies with strong balance sheets and non-Europe revenues. In Europe we focus on sectors such as pharmaceuticals and telecoms. We own shares in Vodafone, GlaxoSmithKline and Shire," he said.

The healthcare index, generally seen as a defensive play, bucked the trend and rose 0.2 percent to top the gainers list. The index was helped by Novo Nordisk, which jumped 7 percent after an advisory panel to the U.S. Food and Drug Administration late on Thursday voted to recommend approval of its long-acting insulin degludec.

Volumes in Novo Nordisk were 300 percent of its 90-day daily average by midday trade.

Some analysts said equities were still attractively valued and investors' desire to buy riskier assets could rise going forward. Friday's China data and recent improvement in leading U.S. economic indicators including employment, manufacturing and housing were also positive for the market in the medium term.

China's annual industrial output growth rose more than expected in October, further raising expectations of a modest rebound in the last quarter.

"The best strategy is to play value, in our view, in particular those parts of the market which are going to benefit from the easing in financial conditions that is already underway in the eurozone," Parkes of HSBC said.

"This should favour the financials and we also see the telecoms and energy sectors as being attractive value plays."