European share rally stalls in wait for ECB

Tue Jun 3, 2014 12:36pm EDT

* FTSEurofirst 300 down 0.4 pct, Euro STOXX 50 down 0.2 pct

* Drop in inflation cements 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 and some benchmark indexes retreated from multi-year highs as investors held back from chasing stocks higher before Thursday's European Central Bank meeting.

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 unexpectedly fell last month.

The ECB is widely expected to trim its refinancing rate, send its deposit rate into negative territory and launch a long-term refinancing operation (LTRO) targeted at businesses.

"In the current situation, the ECB has no other choice than to react," said Mathieu L'Hoir, strategist at AXA Investment Managers, which has 562 billion euros ($764 billion) under management.

"If (ECB President Mario Draghi) doesn't do it you can be absolutely sure the euro will move above the $1.40 mark and will rise well beyond it. The rise in the euro drags down the price of imported goods and creates deflationary pressures."

The FTSEurofirst 300 index of top European shares lost 0.4 percent to end at 1,374.78 points, after hitting a 6-1/2 high on Monday. Trading volumes on the benchmark index represented only about three quarters of its average daily volume of the past three months.

The euro zone's blue-chip Euro STOXX 50 index fell 0.2 percent, to 3,241.04 points, while Germany's DAX , which hit a record high on Monday just below the 10,000 mark, ended down 0.3 percent, at 9,919.74.

Despite recent economic data pointing to a slower-than-expected recovery for the euro zone, share prices have been supported by the prospect of fresh intervention from the ECB.

So far this year, the FTSEurofirst 300 has gained 4.4 percent, led by peripheral markets such as Italy and Spain. Milan's FTSE MIB index is up 14.2 percent year-to-date, while Madrid's IBEX is up 8.7 percent.

"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.

"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."

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 2.6 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.

UK building materials supplier Wolseley rose 1.6 percent after posting a rise in quarterly revenue, lifted in part by strong trading in the United States.

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

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

Today's European research round-up (Additional reporting by Leigh Thomas; Editing by Ruth Pitchford)

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