Growth fears puncture European share rally

Fri Dec 7, 2012 4:11am EST

* FTSEurofirst 300 index unchanged
    * Hit 18-month high on Thursday
    * Sentiment backed by hopeful signals from U.S. budget talks

    LONDON, Dec 7 (Reuters) - A rally in European shares ran out
of steam on Friday after the region's leading economy cut its
growth forecasts, puncturing optimism prompted earlier by
expectations of progress in U.S. budget talks.
    The FTSEurofirst 300 index traded unchanged at
1,131.50 points at 0840 GMT, having risen 7 percent since
mid-November and hit 18-month highs on Thursday on expectations
a 'fiscal cliff' of tax rises and spending cuts that could stall
the world's largest economy will be avoided. 
    But Germany's Bundesbank cut its growth outlook for the
country on Friday, less than 24 hours after the European Central
Bank slashed its economic forecasts for the euro zone.
    Germany's DAX index was down 0.1 percent. 
    "You cannot stand in the way of the numbers, which tell us
Europe will be in a recession next year and earnings will be
poor," Justin Haque, a broker at Hobart Capital Markets, said.
    The FTSEurofirst 300 index recorded gains in December in 12
of the last 15 years, and some traders are betting on another
rally this time, fuelled by fund managers adding to their
positions to enhance their performance before the end of the
quarter.
    "(But) if you want to capture the year-end rally you'll have
to be long," Haque said.
    He estimates the euro zone blue-chip Euro STOXX 50
, also flat at 2,602.22 on Friday, could rise to 2,650
by the end of the year before falling back to 2,450, a support
level tested several times in the fourth quarter.
        
    ITALIAN CONCERNS
    Italy's FTSE MIB shed 0.9 percent, the worst
performing major index in Europe, with banks weighed down by
concerns Mario Monti's government, put in place last year to
promote an austerity and reform agenda, could fall.
    Former premier Silvio Berlusconi's party withdrew its
support for Monti on Thursday, raising the risk of a snap
election, but President Giorgio Napolitano said he would work to
avoid a crisis and there was no need for alarm.
    If the government does fall, an election would likely be
called only a few weeks earlier than the expected date in early
March, but this would upset nervous investors. 
    But William De Vijlder, chief investment officer for
strategy & partners at BNP-Paribas Investment Partners, said the
European Central Bank's pledge to buy the debt of countries that
apply for financial aid provided reassurance for investors.
    That meant a repeat of the sharp share price volatility seen
in 2011 was unlikely. 
    "On the financial side, it seems things are under control
thanks to the (ECB's) preparedness to provide guarantees," he
said.
    The Euro STOXX 50 volatility index, which gauges option
prices on euro zone blue chips and is regarded a measure of
investor expectations of future share price swings, was up 1.8
percent at 17.29.
    It was rebounding from a five-year low of 16.26 hit last
month, but was well below a high of 60 reached in the summer of
2011.
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