European shares fall as ECB tender rally fades

European shares fall as ECB tender rally fades

London: European shares fell on Wednesday in thin trade after investors booked profits from earlier session gains as hopes that banks would use the European Central Bank’s three-year funding to buy peripheral debt waned, with Italian and Spanish yields rising.

Volume was low, exaggerating movements, and traders said while the €489 billion take-up by banks at the ECB offering would help ease banks’ balance sheets, it was not a solution to the region’s debt crisis and countries were still heavily indebted.

“Does it solve all the problems? Clearly not. Italy and Spain still have serious deficits," said David Coombs, fund manager at Rathbone Brothers, which has $23.85 billion under management.

“The tender may take the strain off the banking system, but what we still need is for yields in the sovereign euro zone peripheral to come down. We remain underweight (on) equity financials."

Banks stocks, which had featured as one of the best performing sectors following the ECB tender, pared gains, with the STOXX Europe 600 Banks index up 0.1% as worries turned to why banks needed so much money.

“It is an indication of how frozen up the interbank market is," Michael Hewson, market analyst at CMC Markets, said. “The key question now is how much of that cash finds its way into businesses."

By 06:56 pm, the pan-European FTSEurofirst 300 index of top shares was down 0.5% at 972.14 points after being up as much as 989.66.

The FTSEurofirst 300 is down 12% in 2011, hurt by fears the euro zone debt crisis could lead to massive defaults and drag the region into a recession.

According to data from EDHEC-Risk Institute, short-selling has been the best hedge fund strategy in 2011, up 6.3% in the first 11 months, while world stocks were up 0.7% year-to-date and European stocks down 13%.

The second-best strategy has been fixed-income arbitrage, up 3.5% in the first 11 months, while all other strategies struggled although none posted double-digit losses, EDHEC data showed.