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European shares steady, S&P Greek debt deal view hits banks

Published 07/04/2011, 05:01 AM
Updated 07/04/2011, 05:04 AM
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* FTSEurofirst 300 up 0.01 pct

* S&P comments on Greek debt deal weigh on banks

* Volatility rises, U.S. holiday to hit volumes

By Simon Jessop

LONDON, July 4(Reuters) - European share prices were flat on Monday and on course to snap a five-session rally after credit rating agency Standard & Poor's raised fresh concerns over private sector involvement in a second Greek bailout package, hitting banks sharply after a strong rally last week.

S&P said current French plans to roll over Greek debt held by private banks would likely constitute a "selective default", increasing uncertainty over the structure of a future debt deal and prompting profit-taking among major banking stocks.

The cost of insuring Greek sovereign debt against default rose on the S&P comments, with five-year credit default swaps (CDS) on Greek government debt up 48 basis points at 1,900 bps (19 percent).

By 0829 GMT the STOXX Europe 600 Banks index was down 0.9 percent, leading sectoral fallers across the region after a 7.6 percent gain last week, after Greece backed the austerity cuts needed to secure near-term funds.

European leaders over the weekend released their portion of a 12 billion euros ($17 billion) tranche of funds, with the International Monetary Fund expected to follow suit at a meeting later this week.

"The primary concern with the Greek situation is the rolling (over) of the debt, and how much time we've actually bought ourselves in the interim. The comments don't really help," said a London-based trader at a U.S. investment bank.

The S&P comments "do puncture some of the enthusiasm that was built up last week", added Keith Wade, strategist at Schroders.

Among major bank stock movers, French banks Societe Generale , Credit Agricole and BNP Paribas were all down between 1 percent and 2 percent.

The Thomson Reuters Peripheral Eurozone Banks index , meanwhile, was down 0.7 percent.

While the main FTSEurofirst 300 share index remained in a tight range, flat at 1,119.39 points, investor sentiment as measured by the Euro STOXX 50 volatility index rose more than 3 percent as investor demand for riskier assets fell.

The market ended last week at a one-month closing high, buoyed by U.S. data, while overnight gains in Asia were also acting as support. U.S. markets will remain closed on Monday for the Independence Day holiday.

"It makes the market very light and very thin," the trader at a U.S. investment bank said. "There will be some reasonable activity between, say, 8 and 1030 and after that volumes will taper off for the rest of the day."

"This leads to increased volatility, so you could see a wild move coming from nowhere with no real rationale behind it," he added.

In spite of the subdued opening to the week and the S&P comments, Ian Scott, Global Head of Equity Strategy and Quantitative Research at Nomura, said he remained positive on European equities.

"I think there will eventually be a deal (on Greek debt), even though it may take some time," said Scott, who has upgraded his stance on continental European shares to "overweight" from "neutral".

A sector note over the weekend from Nomura said the overall equity risk premium over government bonds in Europe stands at "a lofty 9.5 percent on our calculations, out of line with realised and implied volatility". ($1=0.705 euros) (Editing by Greg Mahlich)

============================================================ For rolling updates on what is moving European shares please click on ============================================================ For pan-Europeanmarket data and news, click on codes in brackets: European Equities speed guide................... FTSEurofirst 300 index.............................. STOXX Europe index.................................. Top 10 STOXX sectors........................... Top 10 EUROSTOXX sectors...................... Top 10 Eurofirst 300 sectors................... Top 25 European pct gainers....................... Top 25 European pct losers........................

Main stock markets: Dow Jones............... Wall Street report ..... Nikkei 225............. Tokyo report............ FTSE 100............... London report........... Xetra DAX............. CAC-40............... World Indices.....................................<0#.INDEX> Reuters survey of world bourse outlook......... Western European IPO diary......................... European Asset Allocation........................ Reuters News at a Glance: Equities................. Main currency report:.................................

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