London: European shares ended flat on Monday as a sharp relief rally triggered by a euro zone rescue plan for Spain’s banks faded, and were braced for a bumpy ride as sellers started to target debt-laden Italy.
The FTSEurofirst 300 index of top European shares closed 0.1% higher at 983.06 points, after going as high as 1,001.38 on short-lived enthusiasm about a 100 billion euro agreement to recapitalise Spain’s struggling lenders.
Investors fretted about the lack of details of the plan, including whether funding from the European Stability Mechanism would be used and if this would trigger credit default swaps.
There was also speculation that euro zone countries that have previously received international assistance would ask to renegotiate their bailouts, feeling that Spain received more favourable terms.
“The bailout for Spain is a good short-term fix, not a long-term solution, which is fiscal integration and is politically impossible at the moment,” Nicola Marinelli, portfolio manager at Glendevon King, said.
“We still have some hurdles in the Greek elections (next weekend) and the possible renegotiation of the bailouts for Portugal, Ireland and especially Greece.”
Marinelli expected the market to go through “periods of rallies and panic” and said he was building his portfolio “as conservatively as possible”, with three-month rolling short positions on the euro and options to sell the Euro STOXX 50 index maturing in December.
The euro zone blue chip index ended 0.3% lower at 2,137.70 points and appeared poised for further losses after failing to keep above a “bullish gap” between the previous session high and the open on Monday.
“The gap failed to support the Euro STOXX and the euro dollar failed to clear a crucial short-term barrier at 1.2670 so that’s an argument for a bearish scenario in the coming week,” said Ouri Mimran, a technical strategist at Natixis in Paris.
“The short-term target would be the recent low at 2,050 and the next important support at 1,936, which is the 2011 low.”
The Euro STOXX 50 volatility index - Europe’s main gauge of anxiety, and known as the VSTOXX - rose 5.3% to 31.99.
Italian banks were the biggest drag on the Euro STOXX 50, with leading lenders UniCredit and Intesa Sanpaolo shedding 8.8% and 5.9%, respectively, in brisk trade.
Milan traders cited additional strains on the Italian public coffers from taking part in the Spanish banks’ bailout, piling pressure on Italian banks to buy the country’s sovereign debt if Rome comes under market pressure.
Italy’s FTSE MIB was the worst performing major national index across Europe as it shed 2.8%.
German auto maker Volkswagen was among top euro zone blue chip gainers as it rose 1.3% after unveiling record May sales at its luxury division, Audi.