London: European shares fell early on Monday as banks gave up some of last week’s strong gains, and with miners hurt by falling metals prices after Japan intervened to stem the yen’s rise against the dollar.
Strategists said market sentiment in the short term would still be driven by more detailed information becoming available on the plan announced by euro zone leaders last week to stem the bloc’s debt crisis.
At 3:34pm, the FTSEurofirst 300 index of top European shares was down 1.2% at 1,006.15 points, after rising for five straight weeks, including a 4.1% gain last week as investors took heart from policymakers’ plans to tackle the euro zone’s problems.
Japan sold the yen for the second time in less than three months after it hit another record high against the dollar. A stronger dollar makes dollar-priced metals costlier for the holders of other currencies and reduces demand.
Heavyweight miners fell, including BHP Billiton , down 3.2%. The STOXX Europe 600 Basic Resources index fell 2.5%.
“The main overnight news was the Bank of Japan intervening on the foreign exchanges. The correlation (between the euro and European equities) ensures a weak start for equities,” Jeremy Batstone-Carr, strategist at Charles Stanley, said.
He also pointed to doubts about the euro zone plan. “Last week we saw a huge rise in equity markets largely on the revelation of a structure of a plan, with no detail on the funding.”
Europe is looking to countries with big foreign exchange reserves, such as China, Japan and major emerging economies, to provide the extra financial firepower to strengthen the euro zone fund four- to five-fold to about 1 trillion euros. But investors may grow anxious as they see a muted response.
Other fallers included several financial stocks that gained sharply last week, on optimism about recapitalisation and growing confidence that a banking crisis would be averted.
NOT SO OPTIMISTIC
The STOXX Europe 600 Banks index fell 2.9%. Italy’s UniCredit fell 5%.
Strategists also said bond markets were not pricing in as much optimism as equities following last week’s package. Italian bond yields remained above 6% following weak demand at a bond auction on Friday, a reminder that the euro crisis is far from solved. Investors remain worried that Italy may yet be engulfed in the crisis.
Italy’s benchmark stock index fell 2.7% and has lost more than 19% in 2011.
BNP Paribas and Societe Generale fell 4.9 and 5% respectively, after Citigroup cut its target prices on French banks.
The broker cited concerns about deleveraging, the required capital increases and funding pressure. It said: “Some of the ‘top-down´ risks (sovereign haircuts, slowing economy, funding) are affecting the ‘bottom-up´ attractiveness of their franchises.”
The pan-European index is on track to gain about 9% in October, despite Monday’s weakness, its biggest monthly gain in more than two years.
The index dropped nearly 40% from a high in February to a lw in September, but has recovered nearly half this ground, on optimism that policymakers are making progress on tackling the euro zone crisis.
Some strategists say the rally could gather more pace.
“Fading sovereign and cyclical risk, as well as better liquidity conditions, should produce a better tone in markets until year-end,” UBS said in a note.
“Risk assets ought to fare better over the next two months and accordingly we opt to position for a modest rally in risk assets in our model portfolio.”
Among the biggest company movers, Danish wind turbine manufacturer Vestas Wind Systems was a standout loser, down 20.8% in high trading volumes, after the group issued a profit warning late on Sunday.