U.S. budget worries peg back European shares

Thu Dec 27, 2012 12:48pm EST

* FTSEurofirst 300 closes roughly flat at 1,137.60 points

* Euro STOXX 50 rises 0.4 pct to 2,659.95 points

* U.S. "fiscal cliff" worries push shares off intraday highs

* Most traders positive, expect eventual "fiscal cliff" deal

By Sudip Kar-Gupta

LONDON, Dec 27 (Reuters) - Fresh concerns that the United States may fail to reach a deal to avoid growth-sapping fiscal measures weighed on European shares on Thursday, although most traders still felt an agreement would be reached.

The pan-European FTSEurofirst 300 index closed broadly flat at 1,137.60 points, although the euro zone's blue-chip Euro STOXX 50 index edged up by 0.4 percent to 2,659.95 points.

Traders remained focused on progress by U.S. politicians to avoid a "fiscal cliff" - a combination of government spending cuts and tax rises due to take effect early next year which could hit the U.S. economy.

The FTSEurofirst 300 fell from an intraday high of 1,141.79 points after U.S. Senate Majority Leader Harry Reid warned the country could go over the edge of the "cliff".

However, most traders still felt an agreement would be struck, expecting that even if a deal was not reached by the end of December, politicians would form one in January that would avoid causing any undue damage to the U.S. economy.

"Clients are a little bit nervous. We may get a further pullback going forward but the general outlook is still positive. The general expectation is that when push comes to shove, they'll reach an agreement," said Giles Watts, head of dealing at City Index.

SOLID GAINS IN 2012

Along with worries over the U.S. budget situation, some concerns remain over the euro zone's sovereign debt crisis, which resulted in a bailout of Greece and has hit the region's economies.

This was highlighted on Thursday by a 19.5 percent fall at nationalised Spanish bank Bankia, after the bank's rescue fund gave a negative valuation on the company.

However, pledges from the European Central Bank (ECB) to take new steps to help debt-ridden countries such as Spain and Italy have enabled European stock markets to rise over the course of the second-half of the year.

The FTSEurofirst 300 has risen around 14 percent since the start of 2012 and remains close to a 19-month high of 1,144.15 points reached last week. The Euro STOXX 50 has gained 15 percent, while Germany's DAX equity index has risen nearly 30 percent.

Caroline Vincent, European equities fund manager at Cavendish Asset Management, felt European shares would continue to rise in January and added she expected U.S. politicians to reach a deal over the "fiscal cliff".

"I'm not unduly concerned by the 'fiscal cliff'. I believe that they will come to some form of an agreement," said Vincent.

"I believe that this upward movement of the market will continue into January," she added.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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