European shares fall on miners, autos

European shares fell yesterday after hitting their highest close in more than nine months on Friday, as miner Rio Tinto came under pressure in the China spy case and Volkswagen led the auto sector lower.

The FTSEurofirst 300 of top European shares closed 0.6 per cent lower at 944.64 points. Volumes on the pan-European index were about 69 per cent of its 90-day daily average volume.

Miners weighed after Rio Tinto shed 3.2 per cent after China stepped up its spying allegations against the company.

Within the sector, Xstrata, BHP Billiton, Anglo American, Fresnillo, Kazakhmys and Antofagasta were down two to four per cent.

In the auto sector, Volkswagen sank 7.5 per cent after HSBC downgraded its rating on the carmaker to "underweight" from "neutral" and cut its price target.

Daimler was also weaker, losing 3.7 per cent after Morgan Stanley downgraded it to "underweight" from "overweight". The FTSEurofirst 300 ended higher for a fourth straight week on Friday, aided by stronger second-quarter corporate earnings and, despite yesterday's losses, is up 46 per cent since hitting a lifetime low in March. It slumped nearly 45 per cent last year.

"It's a fair assumption that corporate earnings growth will, having turned around, form a base in the second quarter," said Robert Parker, vice chairman at Credit Suisse's asset management arm.

"The outcome has been better than analysts' forecasts. I suspect that will be the case in the third quarter, although I question whether it's durable going forward through the middle of next year," he said, adding that consumers in developed countries had to cut spending and raise their savings.

Banks were also generally weaker, with Lloyds Banking Group shedding four per cent on a report in the Sunday Times that the bank may consider a multi-billion pound share issue as part of a partial withdrawal from the government's asset protection scheme.

Other fallers in the banking sector included Barclays, BNP Paribas, Royal Bank of Scotland, Santander and Société Générale , down 0.5-3.6 per cent.

But Belgian financial services group KBC advanced more than 13 per cent, boosted by the company's return to profit in the second quarter and positive broker comments.

Across Europe, Britain's FTSE 100, Germany's DAX and France's CAC 40 were down 0.2-0.8 per cent.

"Looking to the coming weeks, seasonal aspects suggest that the much more bullish sentiment recently will be subjected to a brief test once the predominantly positive impulses from the second quarter reporting season run their course," said Gerhard Schwarz, head of global equity strategy at UniCredit.

"Setbacks should, however, remain moderate and short-lived. We continue to recommend exploiting setbacks to increase equity exposure."

UK life insurer Friends Provident surged seven per cent after it said it had agreed to talks with suitor Resolution following receipt of a revised offer valuing it at $3.2 billion.

Within the sector, Prudential, Standard Life, Old Mutual and Swiss Life added 0.6 to 3 per cent.

Shares in Publicis rose 4.3 per cent after the French company said it had agreed to buy the Razorfish advertising agency from Microsoft for $530 million, boosting its number one position in digital ad communications.

A slew of economic data and reports from across the world revived hope that the market has seen the worst phase of the credit crisis and should be on a gradual recovery path.

Goldman Sachs raised its forecast of China's gross domestic product growth for 2009 to 9.4 per cent from 8.3 per cent, while Morgan Stanley said the US car market had bottomed and looks poised for a very strong rebound.