European share rally stalls ahead of ECB

Tue Jun 3, 2014 7:42am EDT

* FTSEurofirst 300 down 0.5 pct, Euro STOXX 50 down 0.3 pct

* Drop in inflation fuels expectation of ECB action

* Risks seen on the downside if no new ECB measures unveiled

By Blaise Robinson

PARIS, June 3 (Reuters) - European shares slipped on Tuesday in thin volumes, with a number of benchmark indexes retreating from multi-year highs as investors awaited Thursday's European Central Bank meeting before chasing stocks higher.

Expectations of fresh measures by the central bank to support the region's fragile economic recovery and avoid deflation were cemented on Tuesday after data showed euro zone inflation fell unexpectedly in May.

Sources told Reuters last month that the central bank was preparing a package of policy options, including cuts in all its interest rates and targeted measures aimed at boosting lending to small and mid-sized firms.

"Stocks are buoyed by hopes to see the ECB unveil new measures, conventional and unconventional," said David Thebault, head of quantitative sales trading, at Global Equities.

"(ECB President Mario) Draghi has been very credible so far, but with stock indexes at such levels, if he fails to deliver this week, the disappointment could spark a real pull-back."

At 1123 GMT, the FTSEurofirst 300 index of top European shares was down 0.5 percent at 1,373.62 points, after hitting a 6-1/2 high on Monday, while the euro zone's blue-chip Euro STOXX 50 index was down 0.3 percent.

Germany's DAX, which hit a record high on Monday just below the 10,000 mark, was down 0.5 percent.

So far this year, the FTSEurofirst 300 has gained 4.6 percent, led by peripheral markets such as Italy and Spain. Milan's FTSE MIB index is up 14.4 percent year-to-date, while Madrid's IBEX is up 9.1 percent.

For investors betting on further ECB action, Bank of America-Merrill Lynch strategists suggest buying construction and financial services stocks.

"Any potential easing or policy response which is growth-positive could lead to some cyclical sector outperformance," they wrote in a note.

"Construction and financial services are both cyclical and fare well on earnings revisions and on positioning as both are under-owned by investors."

Bucking the trend on Tuesday, shares in Logitech rallied 3.4 percent in what traders called a relief rally for the computer accessories maker after Apple kicked off an annual developers' conference without unveiling new products competing with Logitech.

Europe bourses in 2014: link.reuters.com/pap87v

Asset performance in 2014: link.reuters.com/gap87v

Today's European research round-up

(Editing by John Stonestreet)

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