European shares fall on record Italian bond yields

Mon Nov 14, 2011 1:18pm EST

* FTSEurofirst 300 index ends 0.9 percent lower

* Italy sells bond at record yield

* Euro zone banks fall 2.4 pct

By Brian Gorman

LONDON, Nov 14 (Reuters) - European share prices fell on Monday as low prices in an Italian sovereign bond auction served as a reminder of the credit crunch faced by the country as Rome works to form a new government.

Italy paid a euro-era high price to sell five-year bonds, with investors wary of buying its debt until the country's new leadership undertakes profound economic reform.

"There's still a lot of hard work to do and measures that need to be put in place. Just because a government's been changed, that doesn't reduce the debt," said Dean Tenerelli, fund manager at T Rowe Price, which manages $440 billion.

Italian banks exposed to the country's debt were among the biggest fallers, having been strong gainers on Friday in anticipation of Silvio Berlusconi's exit as prime minister.

Intesa SanPaolo and UniCredit fell 4.1 and 6.2 percent respectively. Investors were also absorbing news of UniCredit's third-quarter loss and plans for a 7.5 billion euro ($10.3 billion) share sale to repair its balance sheet.

With other banks in the euro zone exposed to Italy's debt, and other sovereign debt in the troubled region, The STOXX Europe 600 euro zone Banking Index fell 2.4 percent.

Former European Commissioner Mario Monti worked on Monday to form a new government, replacing Berlusconi, that will try to reverse a disastrous collapse of market confidence in Italy.

But in a sign of the fragile state of the markets, an auction of five-year bonds saw the Treasury forced to pay a record yield of 6.29 percent, up nearly a full percentage point from the last auction in mid October.

Last week Italian bond yields rose above 7 percent, before falling back.

The FTSEurofirst 300 index of top European shares fell 0.9 percent to close at 975.47 points, surrendering earlier gains and in low volume, 77.5 percent of the index's 90-day trading average.

"It just feels like ... traders don't want to become too excited at this stage..... 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," said Markus Huber, head of German sales trading at ETX Capital.

Italy's FTSE MIB fell 2 percent; Spain's IBEX fell 2.2 percent.

Spain's borrowing costs also risk hitting euro-era highs at auction this week, fuelling fears it is getting dragged back into the heart of the euro zone debt crisis. Secondary market yields on benchmark Spanish 10-year debt rose to over 6 percent on Monday for the first time since the European Central Bank started buying the country's bonds.

SAFE HAVENS

The benchmark index is down 13 percent in 2011, as the euro zone crisis has taken its toll on sentiment, and hit the outlook for growth. Euro zone industrial production fell 2 percent in September, pointing to a sharp contraction towards the end of the year and a growing threat of a fall into recession.

HSBC strategists said they expected to see "increased interest in perceived safe havens as the crisis unfolds".

They added: "Our highest conviction safe havens are telecoms and energy. Valuations are attractive, large international funds are underweight and earnings are proving to be resilient."

Vodafone and French oil heavyweight Total are among its top picks.

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