Financials drag European shares lower as ECB meeting nears

MILAN (Reuters) - European shares inched lower on Tuesday dragged down by losses in the heavyweight financial sector as worries over North Korea persisted and caution grew before a European Central Bank policy meeting later in the week.

General view of the Frankfurt stock exchange, Germany, June 29, 2015. REUTERS/Ralph Orlowski

The pan-European STOXX 600 .STOXX index fell 0.1 percent, giving up the slight gains seen earlier in the session, while euro zone blue chips .STOXX50E declined 0.3 percent.

“Markets are downplaying North Korea and focusing on economic fundamentals... investors should begin tilting their portfolios towards being more defensive,” Peter Garnry, Head of Equity Strategy at Saxo Bank, said in a note.

Euro zone banks .SX7E were an outstanding faller, down 1.6 percent to their lowest level in around 10 weeks, with the sector back in focus ahead of Thursday's ECB meeting that could shed light on the timing for an unwinding of big stimulus.

The ECB is expected to announce the end of its 2 trillion euro ($2.38 trillion) plus bond-buying scheme later this year, even though concern among policymakers over a strong euro has fueled expectations the stimulus will not be withdrawn quickly.

“It’s been very well telegraphed from certain officials that the market should really push expectations of a taper forward,” said Jonathan Roy, advisory investment manager at Charles Hanover Investments.

Any delay in withdrawing the bond-buying stimulus could hurt banks which benefit when yields and interest rates rise.

Shares in Banco Santander SAN.MC, BNP Paribas BNPP.PA, UniCredit CRDI.MI and Deutsche Bank DBKGn.DE were all down between 1.7 and 1.9 percent.

In spite of the weakness analysts at some big investment banks were upbeat. UBS strategists upgraded European banks to overweight from neutral as they expect cyclical sectors to get a boost when the ECB eventually scales back its stimulus.

They also said that the recent strengthening in the euro made them more cautious on U.S.-exposed stocks but more positive on domestically exposed companies.

On the macroeconomic side, a survey showing that euro zone business activity remained strong in August was the latest evidence that the bloc’s recovery is maintaining its pace.

The recovery has been a key support behind the robust earnings growth of the past two quarters.

Energy stocks .SXEP were among the top-gaining sectors, up 0.56 as oil prices rebounded. [O/R]

Health stocks also rose, led by Germany's Merck KGAA MRCG.DE, up 2.4 percent, which said that it was considering selling its consumer health business.

Among mid caps, Aveva AVV.L rose 25.7 percent. The British engineering software firm agreed to combine with Schneider Electric's SCHN.PA software business, creating a London-listed company worth more than 3 billion pounds ($3.90 billion).

Shares in Schneider Electric advanced 0.3 percent.

Inmarsat ISA.L fell 6.5 percent after broker Numis began its coverage of the stock with a "sell" rating, with analysts saying that they were cautious over the company's revenue prospects and margin outlook.

Reporting by Danilo Masoni; editing by Ken Ferris