LONDON (Reuters) - European shares slipped back on Monday, snapping a four-day winning run, with banks sliding on renewed worries about euro zone peripheral debt as well as political gridlock on the U.S. debt ceiling.
The pan-European FTSEurofirst 300 .FTEU3 index of top shares fell 0.4 percent to close at 1,104.74 points.
The STOXX Europe 600 Banking Index .SX7P, exposed to the euro zone’s peripheral debt, fell 2.8 percent after rising 9.2 percent in the previous four sessions.
Italy’s Intesa SanPaolo (ISP.MI) and UniCredit (CRDI.MI) fell 8.3 and 7.1 percent respectively. Other fallers in the sector included Dexia (DEXI.BR), down 8.2 percent, and Societe Generale (SOGN.PA), down 4.7 percent.
The Thomson Reuters Peripheral Eurozone Banking Index .TRXFLDPIPUBANK fell 4.7 percent.
Moody’s cut Greece’s credit rating further into junk territory on Monday and said it was almost certain to slap a default tag on its debt as a result of a new EU rescue package.
The spread between peripheral bonds and German Bunds widened and Italian stocks fell after Bloomberg reported that the Greek bailout deal is facing opposition in the Slovak parliament.
“People assume the U.S. will sort out the debt ceiling issue in time. The euro zone is more important for European markets. There was euphoria last week in banks, in particular, but it was short-lived,” said Gavin Launder, fund manager at Legal & General, which has 356 billion pounds under management.
“We’ve got past the immediate Greek problem, but it doesn’t do a lot for growth and all the economies remain in the doldrums.”
A sharply divided U.S. Congress pursued rival budget plans on Monday that appeared unlikely to win broad support, pushing the United States closer to a ratings downgrade and debt default that would send shock waves through global markets.
The pan-European index is up 3.7 percent from a 2011 low it hit last week, but still more than 7 percent below the high it reached in mid-February.
Launder said it might test the high again on “some evidence that we are really only in a soft patch for the economy now, and it’s not going to be another downturn.”
He said second-quarter European earnings had been slightly negative so far as “a lot of the companies that have reported so far are Swedish and Swiss, both of which have been suffering from strong currencies.”
On the upside, Fiat Industrial SpA FI.MI added 5.4 percent after raising 2011 targets and beating profit forecasts by around a fifth.
German automaker BMW (BMWG.DE) gained 2.7 percent after JPMorgan hiked its target price to 94 euros from 88.
The auto sector .SXAP is the best performing in Europe year-to-date, up 12.3 percent.
The Euro STOXX 50 volatility index .V2TX, Europe’s main fear gauge, rose 9.4 percent, suggesting investors’ appetite for risk fell.
“The EU market will trade range bound and we remain cautious on any hint toward a U.S. downgrade should there not be a comprehensive debt deal,” said Atif Latif, a director at Guardian Stockbrokers.
Additional reporting by Joanne Frearson; Editing by David Cowell