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Europe shares gain in volatile trade; G7 move helps

Published 03/18/2011, 08:47 AM
Updated 03/18/2011, 08:49 AM

* FTSEurofirst 300 up 0.2 percent

* G7 intervention helps calm nerves

* "Triple witching" causes volatility in market

By Harpreet Bhal

LONDON, March 18 (Reuters) - European shares gained on Friday after the Group of Seven nations' intervention to curb a rise in the yen helped reassure financial markets unnerved by Japan's earthquake and nuclear crisis.

Turmoil arising from political unrest in the Middle East as well as the events in Japan has rocked equity markets, with the FTSEurofirst 300 trading 2.8 percent lower for the year-to-date.

By 1201 GMT, the pan-European FTSEurofirst 300 <.FTEU3 index of top shares was up 0.2 percent at 1,089.40 points, trading between 1,084.94 and 1,095.18 points intraday.

In an effort to restore confidence to the markets, the G7 stepped in to weaken the Japanese yen which had soared to a record. The yen fell broadly following the intervention.

"The G7 intervention is calming the markets, but we still need a few days of consolidation to think we are over the worst of it," Giles Watts, head of equities at City Index, said.

But traders said the market could succumb to further weakness in the weeks ahead because Japan's nuclear crisis is far from over.

"Moving into the weekend break, there's without doubt going to be a desire for traders to square-off risk. There's going to be little desire to get caught on the wrong side of any panic reaction once the markets close," said Yusuf Heusen, senior sales trader at IG Index.

Japan's nuclear crisis continued to affect specific European companies. French engineering company Schneider, for example, gained 2.9 percent, as traders said the company would benefit from a push towards greater energy efficiency after the Japanese disaster.

On the downside, Germany's E.ON fell 1.3 percent after the company took its Unterwese reactor offline under Tuesday's government decree in the light of events in Japan.

CHINA RATE FEARS

Other fallers on the European market included Spanish banks, following data from the Bank of Spain showed a jump in bad loans in January to their highest level in 16 years.

BBVA fell 1.6 percent, against a 0.2 percent drop on the STOXX Europe 600 banking index.

Caution also prevailed after China raised banks' required reserves by 50 basis points, the third hike this year aimed at curbing inflation, in a move which caused a brief dip in European shares.

Analysts, however, reckoned the underlying fundamentals for European equities were still intact and that recent weakness represented a buying opportunity on attractive valuations.

Equity valuations on Thomson Reuters Datastream showed the STOXX Europe 600 carrying a forward price-to-earnings ratio of 10.8, below a 10-year average of 13.6.

"On 12-month forward earnings both European and UK equities are inexpensive, both trading over 25 percent below average. Using price to book, which avoids the short term risk to the earnings forecast, equities are around averagely valued," analysts at Citigroup said.

Volatility in the market was heightened on Friday by the expiry of contracts for stock index futures, stock index options and stock options across Europe, known as "triple witching" which is expected to last through the trading session.

"Volumes are high because of triple witching across Europe today. We're seeing bargain hunters come in to buy the index at these levels with a view of selling it later for a profit," a London based trader said. (Additional reporting by Joanne Frearson. Editing by Jane Merriman)

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