European shares drop as Italian bond auction fails to assure

Mon Nov 14, 2011 8:47am EST

* FTSEurofirst 300 index down 0.8 percent

* Italy sells bond at record yield

* Trading volumes remain low

By Harro Ten Wolde

FRANKFURT, Nov 14 (Reuters) - European share prices fell further on Monday as an Italian bond auction showed investors were still reluctant to buy any more of the country's debt, although trading volumes were thin as progress was awaited on the forming of a new government.

The sale of 3 billion euros ($4.12 billion) of five-year bonds was seen as a test of investors' appetite for Italy's debt and confidence in former European Commissioner Mario Monti, who was invited on Sunday by Italy's president to lead a new government.

The bond sale gave share prices a short boost but the record yield of 6.29 percent the government had to sell at brought jitters back into the market.

"Given the tiny amounts, the bare minimum Italy is selling these days to get the upper end of that tiny range is encouraging. (Yields) are still clearly eye-watering ... This can only be done for quite a limited time-span," said strategist David Schnautz at Commerzbank.

At 1300 GMT the FTSEurofirst 300 index of top European shares was down 0.8 percent at 977.32 points. Italy's FTSE MIB index fell 1.2 percent after winning as much as 2.3 percent.

Trading volumes were low at around 40 percent of the 90-day average.

"It just feels like ... traders don't want to become too excited at this stage because not only didn't this work out too well in the past few weeks whenever there was good news," said Markus Huber, head of German sales trading at ETX Capital.

"Also, much uncertainty remains regarding the European financial crisis. Many are in no rush to enter the market as they are confident that they will be able to buy stocks cheaper at a later time."

The euro zone's blue chip Euro STOXX 50 fell 1.3 percent to 2,294.18 points. Analysts, however, said that considering the recent tensions in the euro zone, the index has been remarkably resilient.

Bill McNamara, technical analyst at Charles Stanley, said that after establishing a floor at around 2,226, it appeared the index could have scope for further upside in the near term.

"I've never seen so much pessimism, low ratings, such a pile of doom scenarios as currently," a German trader said. "This could be the buying opportunity for the next 10 years."