Banks weakness drag European shares down for fourth straight day

Traders work in front of the German share price index, DAX board, at the stock exchange in Frankfurt

By Danilo Masoni

MILAN (Reuters) – European shares fell on Tuesday, marking their fourth straight day of losses, with banks leading the decline on fresh political jitters and following a downgrade by a top global broker.

The pan-European STOXX 600 index <.STOXX> slipped 0.2 percent. The euro zone blue chips index <.STOXX50E>, in which banks have a higher weighting, fell 0.6 percent while Britain’s FTSE <.FTSE> dropped 0.4 percent.

The end of a surprisingly strong corporate earnings season in Europe has left investors, who have piled back into the region so far this year, searching for the next catalyst to keep the year-to-date rally going and support valuations that are now above their historical averages.

European stocks are now trading at about 15.5 times forward earnings, compared with a historical average of 14 times, according to Thomson Reuters data.

Worries about early elections in Italy has spurred some profit-taking since last week most notably in sectors and stocks that have outperformed such as banks.

“Italy could become a cause for concern on economic and political grounds. The most indebted major euro country is lagging in the reflation process,” said Jeanne Asseraf-Bitton, Head of Lyxor Cross Asset Research.

Asseraf-Bitton, however, remained relatively upbeat on euro zone stocks adding the firm prefers Irish and Dutch stocks and favours Spain over Italy within the region.

Euro zone banks <.SX7E> ended the day 1.6 percent lower with Spain’s Banco Santander <SAN.MC> and BBVA <BBVA.MC> the biggest drags.

A Deutsche Bank downgrade on the sector soured sentiment. Strategists at the German bank cut their rating on European banks to “underweight” and recommended investors lock in gains following the sector’s strong run since last summer.

In a note to clients, they said the sector was among the most sensitive to swings in euro area growth, which they expected to fade, and that prices were no longer compelling.

“There is no particular valuation support.” they said.

The regional banking index <.SX7E> is now down 7 percent since it hit a 1-1/2 year high on May 8. The broader market is down 2 percent since that day.

Barclays said it still expected Italy to hold elections next year, even though chances of a snap vote had risen substantially, with non-negligible risks that anti-establishment parties could win.

“We expect volatility in Italian and periphery assets to increase in coming weeks and to remain driven by electoral polls,” they said in a note.

In spite of weakness seen over the past sessions, the STOXX benchmark is set to end May in positive territory, near two-year highs and scoring its fourth straight month of gains.

Yet as the recent run loses momentum, investors have started to reshuffle their portfolios, seeking fresh catalysts as a surprisingly strong earnings season draws to an end.

While Deutsche Bank has cut banks, recommending that investors buy sectors such as energy and construction, JPMorgan strategists downgraded autos to neutral saying they now favored defensive sectors such as utilities and telecoms.

Among the biggest movers on the day, Swiss food group Aryzta <ARYN.S> slumped nearly 8 percent after reporting flat revenues and saying it could not provide a financial outlook.

Shares in paint maker Akzo <AKZO.AS> fell 1.5 percent as chances of a takeover by US rival PPG slimmed after a court rejected a request by dissident investors to take action against the Dutch group over its rejection of the takeover.

In the UK, shares of British Airways owner IAG <ICAG.L> fell 2.8 percent on the first day of trading following massive weekend disruption to flights due to an IT outage.

Elsewhere among airlines, Ryanair <RYA.I> jumped 3.8 percent after Europe’s biggest carrier by passengers reported a record annual profit that was in line with market expectations.

(Reporting by Danilo Masoni; Editing by Mark Trevelyan and Hugh Lawson)