Financials lift European shares on Spain bailout speculation

Tue Nov 13, 2012 12:41pm EST

* FTSEurofirst 300 up 0.4 percent

* Financials rebound on fresh Spain bailout rumours

* Italian banks lead gains after decent set of results

* Vodafone, E.ON highlight impact of euro zone weakness

By David Brett

LONDON, Nov 13 (Reuters) - European shares rebounded late on Tuesday as a fresh round of trader speculation that Spain may be close to asking for a sovereign bailout fueled appetite for financial stocks.

The FTSEurofirst 300 closed up 4.81 points, or 0.5 percent, at 1,099.16, bouncing off a low of 1,086.37.

Spain's IBEX index jumped 1.7 percent, but bond yields eased only slightly, suggesting there was some scepticism surround the rumours.

"There is talk doing the rounds of a Spain bailout fuelling the markets, but we have been here before only for nothing to come to fruition and I am very sceptical," one London-based trader said.

Spain's dilemma over whether to become the fourth euro zone member to take a bailout remains acute as it would mean more austerity and hardship for its already embattled citizens.

As a result of the talk, banks and insurers - sectors with the most direct exposure to the euro zone debt crisis due to their holdings of sovereign debt - rose 1.7 percent and 0.9 percent, respectively.

There was brighter news from within the banking sector too after Italy's two biggest banks, Intesa Sanpaolo and UniCredit, delivered higher-than-expected profits and strengthened their capital bases even as they both set aside billions of euros against risky loans.

Intesa and UniCredit gained 5.2 percent and 4.4 percent, respectively, while Banco Popoare Di Milano added 4.6 percent after its own results.

EUROPE WORRIES

The need for a speedy resolution to Europe's debt crisis was highlighted in updates from Vodafone and E.ON , with both firms revealing the extent to which they are being affected by weakness in the euro zone.

London-listed heavyweight Vodafone fell 2.5 percent, after it wrote down the value of its business in Spain and Italy by 5.9 billion pounds ($9.4 billion) and lowered its full-year outlook.

German utility E.ON was the top faller on the FTSEurofirst 300, skidding 11.5 percent after it said it would review its outlook for next year, blaming the weak European economy.

The announcement had investors worried across other asset classes too as the cost for investors protecting themselves against E.ON defaulting on its debts spiked.

E.ON's revised outlook dragged on peers with RWE and Centrica, down 1.2 percent and 2.8 percent, respectively, while France's GDF Suez fell 0.3 percent.

Utilities have underperformed the broader European market with the sector so far reporting a 7.4 contraction in earnings year-on-year in the third quarter, compared with an average 19 percent growth across all companies.

Investors continue to shy away from investing in equity markets with many deeming stocks too risky an asset class to plough fresh money into at the moment given the gloomy economic outlook and summer rally.

Abi Oladimeji, head of investment strategy at Thomas Miller Investment, recommended investors to reduce their equity allocation in the short term and take shelter in safer government bonds given the downside risks to the global economy.

"Right now, the global economy is particularly vulnerable to negative shocks and any sizeable shock could well herald renewed recessions across the major developed economies," he said.

German analyst and investor sentiment unexpectedly fell in November a survey showed, as the euro zone crisis weighed on Europe's largest economy.

Of European companies that have reported earnings so far in the current quarter 43 percent have missed expectations, while analysts have cut their forecasts for those firms by an average 2.7 percent for the next quarter.

Emmanuel Cau, a strategist at JPMorgan, said he expected a possible fall could be on the cards for European shares in the first quarter of 2013 as analysts continue to cut their earnings estimates to reflect a worsening macro backdrop.