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European shares bounce back from lows on technical support

Monday, 1 Oct 2012 | 5:21 AM ET

* FTSEurofirst 300 index rises 0.9 percent

* Euro STOXX 50 finds support at 50-day moving average

* Buying across board as investors buy on dips

By Atul Prakash

LONDON, Oct 1 (Reuters) - European shares rose on Monday, bouncing off three-week lows and a major technical support at the start of the new quarter as investors took advantage of price dips to increase their exposure to sectors such as banks and chemicals.

At 0848 GMT, the FTSEurofirst 300 index

of top European shares was up 1 percent at 1,100.37 points, after falling 1.3 percent on Friday. The index, which shed 2.7 percent last week, has traded in a range of 1,074-1,122 over the past two months.

Both cyclical and defensive sectors performed well. Chemicals shares

were up 1.2 percent and travel and leisure stocks

rose 1.1 percent, while banks

gained 1.1 percent and the food and beverages sector

advanced 0.9 percent.

"We are in a new quarter and seeing some fresh buying across the board. Given the background that we have at the moment, with incredibly low interest rates, equities are being seen as the value proposition and it's hard to get too bearish," Paul Kavanagh, partner and equity strategist at Killik & Co, said.

"The dips, which are driven by European concerns, do provide an opportunity to buy equities. But it still remains range-bound because we can expect that Europe will continue to act as a drag on sentiment and focus will stay on U.S. elections and the fiscal cliff," he said, referring to scheduled tax hikes and government spending cuts in the United States.

Persistent concerns about the euro zone debt crisis could prevent a strong rally in stocks, analysts said. They pointed out that Spain's budget, unveiled late last week, showed its debt levels could rise next year, while a stress test on Spanish banks showed banks would need a total of 59.3 billion euros in extra capital.

Some analysts said the resources sector had potential to rally in the near term as slower growth in China, the world's top metals consumer, might prompt authorities to launch more stimulus measures.

That view gained momentum on Monday after China's official manufacturing purchasing managers' index (PMI) showed factory activity contracted for a second month in September, signalling that the world's second-biggest economy probably suffered a seventh straight quarter of slowing growth.

"Investors should take advantage of any weakness to increase their exposure to the equity market longer term," Henk Potts, equity strategist at Barclays Wealth, said. "We still like cyclical stocks."

The STOXX Europe 600 basic resources index

was up 1 percent, slightly outperforming the euro zone's blue chip Euro STOXX 50

index, which gained 0.9 percent to 2,477.25 points.

Charts showed the Euro STOXX 50 drew heavy support as it veered close to its 50-day moving average of 2,447.91 on Monday. It bounced back after touching 2,450.32.

The index faces strong resistance at around 2,605, its high in September, charts showed.

(Editing by Susan Fenton)

((atul.prakash@thomsonreuters.com)(+44 20 7542 6189)(Reuters Messaging: atul.prakash.thomsonreuters.com@reuters.net))

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Top 10 STOXX sectors...........................

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Top 25 European pct gainers.......................

Top 25 European pct losers........................

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