Utilities drag European shares down from near 2-year high

Mon Jan 7, 2013 5:49pm GMT

* FTSEurofirst 300 sheds 0.5 percent

* Gloomy Deutsche Bank note hurts utilities

* Banks gain on softened Basel III liquidity requirement

By Tricia Wright

LONDON, Jan 7 (Reuters) - A leading European share index fell for the first time in 2013 on Monday, with utilities leading a broad retreat after a gloomy note on the sector from Deutsche Bank.

After chalking up a more than 3 percent weekly gain and hitting its highest close in almost two years on Friday fuelled by a U.S. budget deal and solid jobs report, the FTSEurofirst 300 fell 0.5 percent at 1,161.57 points.

"I don't think it's a great surprise that we see a pause," said Andrew Milligan, head of global strategy at Standard Life Investments, which has around 163 billion pounds ($261 billion) of assets under management.

"Generally the backdrop is that clients do seem a little more confident about the world given the economic data that's appearing, or the absence of the 'fiscal cliff' debacle which was hanging over the markets in December."

Investors have started to come back to equities after shunning the asset class for much of the global economic crisis.

According to data from EPFR, global equities enjoyed a sixth straight week of net inflows in the week ended Jan. 2, driven by institutional investors.

Although Europe equity funds posted outflows for the first time since the third week of November, Europe funds based in the United States recorded their 21st straight week of inflows.

Utilities stocks were the standout fallers on Monday, off 1.6 percent, after Deutsche Bank downgraded several firms and advised that there are no safe havens in the sector, traders said.

Deutsche Bank cut its ratings for RWE, E.ON and EDF to "sell" from "hold", with shares in the trio falling 1.7 percent to 3 percent.

"Continental utilities continued to slide in 2012, but we believe the worst is yet to come for the sector. We see further downside earnings risk for generators in Central and Northern Europe," the bank said in a note.

In 2012, Europe's utility index was flat, compared with a 13 percent gain in the benchmark FTSEurofirst 300 index, which posted its strongest annual increase since 2009.

Banks, by contrast, found favour after the Basel Committee of banking supervisors said it will give banks four additional years and more flexibility to build up cash buffers, allowing lenders to put some of their reserves to work, which should boost economic growth.

Natixis surged 5 percent, UniCredit added 1.8 percent and Banco Popular rose 2.1 percent.

"Loosening the noose, as it were - giving them a bit more breathing space by not imposing such harsh capital requirements, is something that the banking sector has been crying out for for ages," Angus Campbell, head of market analysis at Capital Spreads, said.

"That's excellent news, not just for the banks, which are a bit higher today, but for the wider economy as well."