European shares post best quarterly rise in 10 years

European shares fell yesterday after US regional business activity contracted in September, but the main FTSEurofirst 300 index still managed to post its best quarterly rise in nearly 10 years.

The FTSEurofirst 300 index of top European shares ended 0.5 per cent lower at 997.56 points, dragged down by banks and oil producers.

The index was up 17.3 per cent in July-September, its biggest quarterly rise since December 1999. It rose nearly 16 per cent in the previous quarter but was still down 39 per cent from a peak in mid-2007.

Across Europe, Britain's FTSE 100 lost 0.5 per cent but still posted its best-ever quarterly rise. Germany's DAX dropped 0.7 per cent and France's CAC 40 eased 0.5 per cent.

Banks, which have rallied 171 per cent since March, were among the stand-out losers after the Institute for Supply Management-Chicago business barometer fell to 46.1 in September from 50 in August.

Economists had forecast the index at 52.0. A reading above 50 indicates expansion in the regional economy.

BNP Paribas, HSBC, BBVA, UBS, Deutsche Bank, Commerzbank and Société Générale were down 1.2-3 per cent.

"In the near term, there is some vulnerability because the market did get quite overbought in the last week or two," said Ronan Carr, European equity strategist at Morgan Stanley in London. Although the FTSEurofirst 300 is near its 12-month highs, the 14-day momentum and the 14-day Relative Strength Index have been trending down over the past week, a sign that the market could be overbought technically.

"On a six-to-nine-month view, the rally can go a little bit further. We do expect the recovery in growth to continue to come through and at the same time, monetary and fiscal policy will stay very loose - positive backdrops for equities," Mr Carr said.

Data, however, showed recovery would be erratic, with US private employers cutting a bigger-than-expected 254,000 jobs in September. The US economy contracted at a slower pace than previously thought in the second quarter.

Oil producers in Europe were also weaker on concerns over the patchy economic recovery. BP, Royal Dutch Shell and Total lost 0.4-1.3 per cent. Insurers lent some support, with Legal & General up 6.1 per cent on continued speculation it could be a takeover target. Italian insurer Generali said it had no interest in Legal & General, denying media reports and market speculation that have named it as potential buyers.

Peers Aviva, Standard Life, RSA Insurance and ING Group put on 2.7-3.9 per cent.

Volumes on the FTSEurofirst 300 were about 120 per cent of the 90-day daily average volume.

Leading global investors cut equity holdings to their lowest level since February and boosted bonds and cash in September, a Reuters poll showed, as they grew nervous about adding more risky assets after the broad rally.

A separate Reuters survey showed major world stock markets would likely stutter to the end of the year following the strong push in March.

British retailer Marks & Spencer lost 3.4 per cent, with some analysts saying that better-than-expected sales and profit margins were factored into a recent rally in its shares, while a downgrade in its cost guidance was not.

Also on the downside, Bayer shed 3.1 per cent after UBS downgraded the chemicals and drug conglomerate to "neutral" from "buy" on valuation grounds.