European shares dip, banks extend sharp rally

Tue Jan 8, 2013 6:02pm GMT

* FTSEurofirst 300 down 0.1 pct, Euro STOXX 50 down 0.2 pct

* Euro STOXX 50 halted at major resistance level from 2011

* Banking stocks extend rally on softened Basel rules

* Germany's DAX dragged by data showing slide in exports

* Credit Suisse's tactical indicators signal overheating

By Blaise Robinson

PARIS, Jan 8 (Reuters) - European shares dipped on Tuesday, tracking losses on Wall Street, with a key blue-chip index halted by a major resistance level and investors braced for sluggish corporate results in the upcoming earnings season.

Losses were limited, however, by further gains in the euro zone banking sector, sparked earlier this week by news that incoming global bank liquidity rules will be softened, giving the lenders extra breathing space.

Banco Popolare surged 3.6 percent, Societe Generale added 3.2 percent, and UniCredit gained 2.1 percent.

The FTSEurofirst 300 index of top European shares closed 0.1 percent lower at 1,160.20 points, drifting away from a near-two-year high hit on Monday.

The euro zone's blue chip Euro STOXX 50 index fell 0.2 percent, to 2,691.45 points.

After a sharp rally started in mid-November, the benchmark index has been halted for a week by a major resistance level at 2,709 points, representing the starting point of a near 30 percent nosedive in mid-2011.

"Charts show some hesitation at major resistances, so it doesn't look too good on the short term," said Philippe de Vandiere, analyst at Altedia Investment Consulting.

"Earnings are not going to be good, with a lot of company results hit by restructuring costs. We already know it will be grim, so the focus will be on the outlook, basically any comment about visibility, which seems to be nil at the moment."

CHASING YIELDS

De Vandiere remains positive on European equities on the medium term, however, pointing out to the lack of alternatives for investors, with extremely tight yield spreads on corporate bonds.

"A lot of investors are hungry for yields at the moment, and equities offer a relatively good value. We're already seeing flows coming out of the fixed income space and into equities, although retail investors haven't switched yet," he said.

"On the medium term, there is still potential for European stocks to continue their relief rally, while U.S. shares look a big pricey at these levels."

U.S. Aluminium major Alcoa Inc is set to kick-start the fourth-quarter earnings season after Wall Street's closing bell on Tuesday, and as the first component of the Dow Jones industrial average to report, the group's results are seen as setting the tone for the reason.

Around Europe, UK's FTSE 100 index fell 0.2 percent on Tuesday, France's CAC 40 gained 0.03 percent, Spain's IBEX added 0.4 percent and Italy's FTSE MIB climbed 0.3 percent.

Germany's DAX index underperformed, losing 0.5 percent, hit by data showing a slide in the country's exports and industry orders, which fuelled worries the euro zone crisis may have pulled the region's largest economy into contraction late last year.

OVERHEATING?

Shares in Vodafone rose 1.7 percent after its partner in U.S. joint venture Verizon Wireless said it would be "feasible" to buy out the British telecom giant.

The euro zone's blue chip Euro STOXX 50 has jumped nearly 30 percent since early June, when fears about a break-up of the euro zone started to abate, a 'relief rally' which could continue in 2013, Dorval Finance fund manager Sophie Chauvellier said.

"We're really at the beginning of a phase of revaluation of asset prices. At this point, equities are the only asset class where risk is correctly remunerated," she said.

Strategists at Credit Suisse, however, are concerned about the risk of investor complacency while concerns about U.S. fiscal problems continue to brew, prompting them to turn more cautious on equities and forecast a consolidation phase.

"Our tactical indicators for equities have moved to elevated - but not yet alarming - levels," they wrote in a note.

"Global risk appetite is one standard deviation above its norm, while equity sector risk appetite is 0.4 standard deviations above and our composite equity sentiment indicator is close to 2-year highs. The net long position of hedge funds is at the highest level since July 2011, while net corporate buying and insider buying are falling."