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European shares rise, mood bearish as defensives lead

European shares rose in choppy trade on Tuesday, with concerns about knock-on effects from Spain’s banking rescue and unease ahead of Greek elections prompting investors to take refuge in defensive plays such as food and utilities stocks.

Stocks traditionally seen as cyclical lost ground, while charts suggested the market was heading for another sell-off soon.

At 1003 GMT, the FTSEurofirst 300 index of top European shares was up 0.5 percent at 987.89 points after crossing into negative territory several times. The index hit its highest since mid-May on Monday on the bailout news from Spain before giving up most of the gains by the close.

Lynnden Branigan, technical analyst at Barclays Capital, said Monday’s trading pattern showed buyers were unable and unwilling to sustain long positions.

“That’s potentially a bearish signal. The risk is going to be to the downside... If we start breaking through the (980) level, you will see some deeper pullbacks towards Friday’s low at 971.24.”

He said the index had probably hit its high for the month and would struggle to move above 1,000, which coincides with its 200-day moving average, in the near term.

Nervous investors cut their exposure to cyclical stocks, with insurers down 0.6 percent and travel and leisure shares falling 0.3 percent.

Defensives rose, with food and beverages and telecoms up 0.8 percent and 1.1 percent respectively.

“People are looking around for defensive trades and trying to find the things that will produce some returns. But it’s not easy. You have got no choice but to be cautious,” said Darren Sinden, senior sales trader at Silverwind Securities.

“Spain’s problems are not fully solved and there are concerns of contagion to Italy. And then we have got the wild card of the Greek elections.”

Euphoria fades

Initial euphoria over Spain’s weekend deal dissipated as investors feared the bailout-related debt could come ahead of regular government bonds in the queue for repayment, adding to its high borrowing costs.

Focus is also shifting to Greece, where parties that support and oppose the country’s international bailout and the harsh austerity measures accompanying it are neck-and-neck in opinion polls ahead of Sunday’s parliamentary vote.

News that European officials have discussed contingency plans including possible capital controls in the case of Greece leaving the euro zone added to investor jitters.

Greek shares were down 1.6 percent.

“Should the Greek elections, the EU summit (on June 28-29) and the next ECB policy meeting (on July 5) deliver at least mildly positive results, a gradual improvement in market sentiment towards the euro zone periphery could materialise eventually, with risks remaining down the (long) road towards a more integrated Europe,” Credit Agricole said in a note.

Ben Hauzenberger, fund manager at Zurich-based Swisscanto Asset Management, said there was a lot of nervousness as Spain might need more bailouts and people did not know how Greece would look after the elections.

“Probably defensive equities such as healthcare and consumer durables are a better place to be than financials,” said Hauzenberger, whose company manages about 55 billion Swiss francs ($57 billion).

But Cheuvreux said in a note that pressure for policy change and market support were starting to bear fruit and domestically-focused euro zone stocks now looked “very cheap”.

The bank cut the cash holding in its portfolio to 7 percent from a record high of 9 percent, although it left the exposure to risk of its portfolio - or ‘beta’ - 5 percent below its MSCI Europe benchmark on a two-year view.

It upgraded French stocks to “neutral” from “underweight” following an 11.5 percent drop in the last three months.