Losses in Lisbon weigh on European shares

Fri May 16, 2014 7:06am EDT

* Portugal's PSI-20 market falls more than 2 pct

* FTSEurofirst 300 down 0.3 pct

* Take more defensive approach -Sunrise Brokers strategist

By Sudip Kar-Gupta

LONDON, May 16 (Reuters) - European stock markets fell on Friday, retreating further from multi-year highs reached earlier in the week, as the Portuguese market underperformed for a second day on concerns over its economy.

The pan-European FTSEurofirst 300 index was down by 0.3 percent at 1,353.78 points in mid-session trading, falling back from 6-year highs reached on Thursday, while the euro zone's Euro STOXX 50 index fell 0.5 percent.

Germany's DAX, which hit a record high of 9,810.29 points on Thursday, fell 0.7 percent to 9,586.59 points while Portugal's smaller PSI-20 index underperformed with a 2.4 percent drop.

Traders said the Lisbon market was impacted by a 10 percent drop in Portuguese bank Banco Espirito Santo after BES announced a discounted share issue to raise capital.

They added that ongoing concerns over the state of Portugal's economy, after data on Thursday showed a shock 0.7 percent drop in gross domestic product (GDP), was further weighing on the market, while Portuguese bonds also fell on Friday.

"We think there is always another euro zone crisis just around the corner," said HED Capital head Richard Edwards.

TIME TO GO DEFENSIVE?

Some traders were confident that the broader, upwards trajectory of European stock markets remained intact.

The FTSEurofirst 300 remains up by nearly 3 percent since the start of 2014, in spite of Thursday's pullback which was triggered by data that showed a surprise contraction in the economies of Portugal and Italy.

Merger activity has also supported European stock markets this year, and French telecoms shares such as Iliad and those of conglomerate Bouygues - which owns Bouygues Telecom - rose on Friday on new signs of takeover activity in the sector.

Andreas Clenow, hedge fund trader and principal at ACIES Asset Management, was unconcerned by Thursday's stock market sell-off and was sticking with "long" positions betting on more gradual gains for European equities.

"So far, I don't see enough damage to the uptrend," said Clenow.

However, Sunrise Brokers equity strategist Christopher backed a more defensive approach to the equity markets and favoured utility stocks - often preferred for their solid dividend yields - for protection in case of any more prolonged stock market declines.

"We are advocating a more defensive bias," he said.

(additional reporting by Lionel Laurent; Editing by Toby Chopra)