Europe shares halt rally as Monti says will quit

Mon Dec 10, 2012 7:10am EST

* FTSEurofirst 300 down 0.5 pct, Euro STOXX 50 down 1.1 pct
    * Italy's stocks sink, debt yields rise as Monti to resign
    * Focus is back on Italy/Germany bond spread -analyst
    * Exane strategists remain 'overweight' Italy, Spain

    By Blaise Robinson
    PARIS, Dec 10 (Reuters) - European shares fell on Monday,
halting a brisk three-week rally, with Italy's benchmark index
sinking nearly 4 percent after Prime Minister Mario Monti said
he would resign, reviving fears about the country's economy.
    At 1148 GMT, the FTSEurofirst 300 index of top 
shares was down 0.5 percent at 1,127.63 points, halting a rally
that had propelled it to its highest level since early June
2011.
    Milan's FTSE MIB index sank 3.7 percent - its
biggest one-day drop in four months - with Intesa Sanpaolo
 losing 6.9 percent, Banco Popolare down 6.8
percent and UniCredit down 6.3 percent.
    "Every Italian stock is down, and banks in particular are
paying a hefty price. The focus is back on the spread," said
Riccardo Designori, equity analyst at Milan-based Brown Editore,
referring to the spread between the yields of Italian bonds and
German Bunds.
    "If the spread continues to widen, the best trade strategy
is to start shorting these stocks. Spanish stocks are also very
vulnerable to the return of 'risk-off' sentiment."
    Short selling - profiting from falling stock prices by
borrowing shares, selling them, then buying them back more
cheaply - is a popular hedge fund strategy.
    The spread between 10-year Italian BTPs and German Bunds
widened to 360 basis points on Monday, from 325 late on Friday.
    On Saturday, Monti announced he would quit once the 2013
budget is approved. The news came two days after Silvio
Berlusconi's party withdrew parliamentary support for the
technocrat government and hours after Berlusconi said he would
run for premier again. 
    The news of Monti's resignation also knocked other European
banks, with BNP Paribas falling 3.1 percent, Credit
Agricole down 3.3 percent and Banco Santander 
down 3 percent.
    "The stress is back, we're asking ourselves again: 'which
stock has exposure to Italy?'" said David Thebault, head of
quantitative sales trading at Global Equities.
    "Monti is the one who managed to stabilise Italy and stop
the contagion from Greece. His surprise resignation brings back
the political risk in the equation, something we had forgotten
about."
    Across Europe, the euro zone's blue chip Euro STOXX 50
 index was down 1.1 percent, UK's FTSE 100 index
 down 0.3 percent, Germany's DAX index down 0.5
percent, and France's CAC 40 down 0.6 percent.
    The Euro STOXX 50 has surged about 25 percent in the past
six months, as bold measures unveiled by the European Central
Bank to resolve the region's debt crisis have soothed fears of a
break-up of the currency bloc.
    Europe's recovery rally has propelled stock valuation ratios
to levels not seen in 2 1/2 years, with the broad STOXX Europe
600 trading at 11.3 times 12-month forward earnings.
    Despite the sudden return of political tensions in the euro
zone, a number of strategists and fund managers remain positive
about the outlook for European equities.
    In a research note on Monday, strategists at Exane BNP
Paribas said they remain "overweight" on Italian and Spanish
equities, due to improving macro fundamentals and the two
markets' superior earnings growth potential.
    "Italy is generally viewed as the 'safer' peripheral play.
Apart from better domestic macro fundamentals, the composition
of the equity markets is better too. Northern Italy has a strong
industrial base, which can be played through mid-caps," the
strategists wrote.
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