Italy, Cyprus woes push European shares to new low

European shares fell to a three-week closing low yesterday, pulled down by poor demand at an Italian debt auction and expectations of a run on Cypriot banks when they reopen on Thursday.

Worries about Italy kept demand soft at its latest debt auction. The 10-year bond drew bids worth 1.33 times the amount allocated, versus an average of 1.48 times so far this year, pushing up Italian bond yields.

“The sell-off is likely to continue in the near term. It looks like there will be no government in Italy for some time and uncertainty in the euro zone’s third-largest economy will continue for another four to five months,” Ronny Claeys, senior strategist at KBC Asset Management, said.

The FTSEurofirst 300 fell 0.4 per cent to 1,184.06 points, the lowest close since early March. It has fallen two per cent from this month’s four-and-a-half-year high, but is on track for a tenth straight month of gains, the best performance ever.

Uncertainty over the scale of capital controls being readied for Cypriot banks after the island’s bailout deal last week also prompted investors to trade cautiously, analysts said.

Cyprus is set to restrict the flow of cash from the island and may curb the use of credit cards abroad. Cypriots are expected to besiege lenders in the morning.

“People are waiting to see what happens in Cyprus tomorrow. A lot of investors are staying on the sidelines as a long weekend is ahead of us,” Frank Bonsee, equity sales trader at ABN AMRO, said.

Cyprus probably will not be the last euro zone country to ask for an international bailout, according to a Reuters poll of economists, who cited Spain and Slovenia as the likeliest candidates.

Euro zone banks bore the brunt, with that index falling 1.4 percent. Italian and Spanish stocks also underperformed, with Italy’s FTSE MIB index falling 0.9 per cent and Spain’s IBEX dropping 1.1 per cent.

Credit Suisse raised its ‘underweight’ stance on continental European shares, saying that European equities were not cheap enough given the region’s debt crisis and weak economies.

The euro zone’s blue chip Euro STOXX 50 fell 1.1 per cent to 2,612.46 points, after moving in a wide range of around 2,560-2,750 since November.

Technical analysts said the index would find strong support at around 2,560, which coincides with a 200-day exponential moving average and a long-term trendline that started in June last year.

“However, if it breaks below the level then we should consider it as the completion of a double top formation - a sell signal that could push the index to test a November low of 2,427,” Roelof-Jan van den Akker, senior technical analyst at ING Commercial Banking, said.

The broader market index fell 0.5 per cent to 292.44 points. Shares in Telecom Italia fell 4.6 per cent.