European shares extend winning run to five weeks

Traders are pictured at their desks at the Frankfurt stock exchange January 2, 2012.

LONDON (Reuters) - European shares notched up a fifth straight week of gains, as the outlook for the global economy improved and on optimism Greece would avoid a messy default.

However, equities suffered a slight reversal on Friday on weaker resources stocks, and with Novartis (NOVN.VX) lower amid doubts about a key drug.

The pan-European FTSEurofirst 300 .FTEU3 index of top shares fell 0.3 percent to close at 1,043.06 points.

Over the week, the index rose 2.5 percent, its fifth weekly advance in a row, having on Thursday hit its highest in more than five months.

The benchmark is up more than 22 percent from a 2011 low in September and has neared overbought territory, with its Relative Strength Index (RSI) coming close to 70.

The RSI is a technical momentum indicator that determines overbought and oversold conditions, with values of 70 and above considered overbought.

Economic data, including manufacturing activity indicators and strong labor data from the United States, the world's biggest economy, has boosted investor confidence in the early part of 2012.

"Some key cyclical indicators have turned, and the German ZEW (confidence index) this week was very strong," said Daniel McCormack, strategist at Macquarie.

"That has surprised the market. This rally still has a way to run, as some investors haven't bought back in yet."

Greece was closing in on an initial deal with private bondholders on Friday. This would prevent it from tumbling into a chaotic default, but result in investors losing up to 70 percent of what they have loaned to Athens.

The STOXX Europe 600 Banking Index .SX7P rose 0.9 percent, having gained 6.2 percent in the previous session, following successful bond auctions in the euro zone region.

The index fell more than 32 percent in 2011, with many banks having to write down the value of euro zone peripheral debt.

Commerzbank (CBKG.DE) rose 6.3 percent, benefitting from an early disclosure of its plans to shore up its capital on Thursday.

Some strategists remained skeptical.

"The underlying problems of the euro zone still persist and, given the seasonal nature of U.S. economic data, it is perhaps too soon to read too much into recent jobs data," said Oliver Wallin, investment director at Octopus Investments.

"As a result, we've been holding our positions and have made no major changes to the portfolios this week. We retain our historically high cash weightings across the range."

SHADOW

Novartis fell 4 percent after the European Medicines Agency advised doctors to continuously monitor patients for six hours after giving them a first dose of the company's multiple sclerosis drug Gilenya, casting a shadow over the potential blockbuster product. <ID:L6E8CK0VW>

Resources stocks were the other main drag on the index on Friday, following concern about China's contracting manufacturing sector.

The STOXX Europe 600 Basic Resources Index .SXPP fell 0.7 percent. Antofagasta (ANTO.L), down 1.9 percent, was among miners to fall as copper prices slipped.

The STOXX Europe 600 Oil & Gas Index .SXPP fell 1.7 percent, tracking crude prices lower. Heavyweight BP (BP.L) dipped 3.1 percent, partly on renewed worries about the costs of the Gulf of Mexico oil spill of 2010.

But Macquarie's McCormack said he was upbeat on cyclicals and had recently changed his portfolio to reflect this, adding to positions in materials, energy and industrial companies.

"If you think the cycle has turned up you have to be in that space," he said.

He said he liked German carmaker Daimler (DAIGn.DE) because of its U.S. exposure.

(Editing by David Hulmes)