European shares knocked from 11-month highs

European shares pulled back yesterday, from an 11-month high reached the previous session, as commodity stocks fell, but Lloyds Banking Group reversed earlier losses on a Goldman Sachs note.

Defensive drug makers, which have lagged the rally, emerged as the day's top gainers.

The FTSEurofirst 300 of top European shares closed 0.5 per cent lower at 1,006.50 points, snapping a three-day winning run but was still up 1.3 per cent for the week. The index breached the 1,000 mark last Wednesday for the first time since October 2008.

Across Europe, Britain's FTSE 100 gained 0.2 per cent yesterday, Germany's DAX lost 0.5 per cent and France's CAC 40 eased 0.2 per cent.

Heavyweight commodity stocks eased as investors pocketed gains after recent hefty rises. Oil and gas producers BP, Royal Dutch Shell, BG Group and StatoilHydro were down 0.2-1.1 per cent.

Among miners, BHP Billiton, Xstrata, Anglo American, Antofagasta and Kazakhmys dropped 0.9-2.5 per cent. But Lloyds Banking Group erased earlier losses to trade up 0.9 per cent after a bullish Goldman note on the UK bank's plan to quit the British government insurance scheme.

"A downsizing of the GAPS (government asset protection scheme) or a rights issue to pay for (parts of) the fee would be attractive alternatives to our base case scenario of full participation," Mr Goldman said.

Mr Goldman also raised its profit outlook and price targets on shares of several European banks, citing lower peak provision estimates and stronger net interest income and trading. HSBC, Banco Santander, UBS, Credit Agricole, Commerzbank and Natixis rose 0.8-3 per cent.

"There is still no indication that the market wants to come down. We are not generating enough noise or investment debate to suggest that the market is tired," said Geoff Wilkinson, head of investment research at Mint in London.

"There is some strong suspicion that some of the move we have seen recently is driven by people who need to buy this market rather than want to," he said.

The index has rallied 56 per cent since hitting a floor in March and is up 18.3 per cent this quarter, on track to post its best quarterly rise in almost a decade. But it is still down 13.4 per cent from its level in mid-September 2008, before the bankruptcy of Lehman Brothers.

The VDAX-NEW volatility index, a gauge of investor risk appetite, hit a two-month low, down 3.7 per cent, as a steady flow of recovering macroeconomic data around the world has fuelled investor appetite for risky assets such as equities. The lower the volatility index, the higher investors' appetite for risky assets such as equities.

Drug makers AstraZeneca, GlaxoSmithKline, Roche Holding, Sanofi-Aventis and Shire rose 0.1-2 per cent.

Food and consumer goods group Unilever gained 1.7 per cent, boosted by a price target hike by HSBC.

Some investors said a rotation into defensive stocks from outperforming cyclical issues may provide fresh impetus to the market.