Retailers lead European shares lower as Tesco sales flatline
* FTSEurofirst 300 down 9.35 points at 1,246.62
* Retailers fall as Tesco turnaround falters
* Italian and U.S. political worries peg back equities
By David Brett
LONDON, Oct 2 (Reuters) - Tesco led European shares lower early on Wednesday after the world's third largest retailer's quarterly revenues flatlined as its turnaround plan failed to bear fruit, prompting earnings downgrades.
Tesco, which is the UK's biggest retailer and has a market capitalisation of 30 billion pounds, fell 3.5 percent in heavy volume after it said: "Challenging economic conditions overseas, particularly in Europe, have held back consumer confidence and spending, leading to a lower level of sales than expected."
"The most notable feature in this update is that the performance in Europe was pretty awful ... we are inclined to downgrade our full-year forecasts for Tesco by around 4 percent, taking trading profits down by 140 million pounds to 3.33 billion pounds," Shore Capital says in a note.
Tesco's update took the shine off rival Sainsbury, which reported rising sales growth, and weighed on the broader retail sector, which fell 1.4 percent and helped drag the Europe's FTSEurofirst 300 down 9.35 points, 0.7 percent, to 1,246.62 by 0736 GMT.
The FTSEurofirst, however, remains in the 15 point range it has been stuck in since last Monday as political turmoil in Italy and the U.S. kept equities from pushing towards fresh highs.
Italy's FTSEMib was down 0.3 percent, having rallied 3.1 percent on Tuesday to near two-year highs, as investors waited to see if Italy's Prime Minister Enrico Letta's government would survive as he sought to win over rebels from Silvio Berlusconi's centre-right party.
The Italian market was being underpinned by gains in banks, which have tracked sovereign bond futures higher.
"Lingering uncertainties on Italy will limit the upside," Credit Agricole said in a note.
"Even if the government survives, which looks more likely following yesterday's news and rumours, political uncertainty would remain," it said.
Most global stock indexes kicked off a new month and a new quarter with gains on Tuesday as investors, for now, appeared confident that a U.S. government shutdown, which threw hundreds of thousands of federal employees out of work, would be short-lived.
"Even a 22-day shutdown (as under former President Bill Clinton) would take only around 0.2 percent off GDP, we estimate. We would use any equity market weakness as a buying opportunity," Credit Suisse said in a note.
"Ultimately, the chances of lengthy stand-off are low because polls show that the Republicans are getting a disproportionate amount of the blame for the shutdown," it said.
But traders remain unwilling to commit fully into equity markets, most of which are trading at multi-year highs, in case of a shock outcome in the United States, the main driver of growth in the developed world.
"If Congress do not come to an agreement and the deadline approaches for the U.S. to make interest payments on $12 trillion of outstanding bonds, traders will start to get twitchy," Mark Ward, head of trading at Sanlam Securities, said.
"But it is worth remembering a U.S. payment default is the absolute worst-case scenario. We are, however, reliant on politicians, so anything is possible," he said.
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