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Europe shares climb in technical rally that may be short-lived

Monday, 1 Oct 2012 | 8:21 AM ET

* FTSEurofirst 300 index rises 1 percent

* Major index finds support at 50-day MA

* Rally broad-based; chemicals, healthcare up

By Atul Prakash

LONDON, Oct 1 (Reuters) - European shares rebounded from three-week lows on Monday in a technical rally, with price dips and the unsurprising results of a Spanish bank stress test luring investors into the market, but analysts said the bounce was unsustainable.

Analysts said the market faced several sources of uncertainty including the U.S. "fiscal cliff" of scheduled tax hikes and government spending cuts as well as the situation in Spain. Charts also show that the euro zone's blue chip Euro STOXX 50

index faces pressure in the near term before a bounceback.

Spanish banks will need 59.3 billion euros in extra capital to ride out a serious economic downturn, an independent report showed late on Friday, matching market expectations. The country is expected to need international help to meet its debt financing needs.

At 1134 GMT, the FTSEurofirst 300 index

of top European shares was up 1 percent at 1,099.73 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.

"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 euro zone's blue chip Euro STOXX 50

index

gained 1.1 percent to 2,481.79 points after drawing support near its 50-day moving average of 2,448. But analysts saw a dip before bouncing back again.

"This is just a short-term bounce in a downtrend, with resistance at around 2,495 and 2,520. But I don't expect a very large correction as it is searching for the development of a higher bottom and that could be above its 50-day moving average," said Roelof-Jan van den Akker, senior technical analyst at ING Commercial Banking, said.

"After making this higher bottom around 2,400 or slightly lower, I expect another rally attempt in trying to break a horizontal resistance level at around 2,600, and if it breaks, then the 3,000 mark will be on the cards."

Still, Monday's rally was broad-based, with both cyclical and defensive sectors performing well. Chemicals shares

were up 1.6 percent, personal and household shares

rose 1.4 percent, banks gained 1 percent, while the healthcare sector was up 1.2 percent.

"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," Kavanagh said.

CAUTIOUS STANCE

Persistent concerns about the euro zone debt crisis could put pressure on the market, analysts said. They pointed out that Spain's budget, unveiled late last week, showed its debt levels could rise next year, while fresh data showed that manufacturing activities in China remained in a contraction mode.

Edmund Shing, head of European equities strategy at Barclays Capital, said he still remained fairly defensive and preferred companies that offered decent dividends. He liked companies such as French drugmaker Sanofi

in the healthcare sector.

He said European equities could fall 5 to 10 percent in the next couple of months as the market faced headwinds such as the U.S. fiscal situation.

Some other analysts also stayed cautious on the market. Investment company Kleinwort Benson said equities looked cheap on a historical basis and there were some positive trends across most asset classes, but it remained cautious despite adding some risk into its portfolios over the past few months.

"Tail risk events threaten the longevity of this rally, though central banks are clearly ready to spring into action," Kleinwort Benson Chief Investment Officer Mouhammed Choukeir said in a note.

According to Thomson Reuters StarMine data, the pan-European STOXX 600 index

has a 2013 average price-to-earnings ratio of 10.4 - cheaper than a comparative 12.6 times average 2013 P/E ratio for the American S&P 500 index

. Across Europe, Germany's DAX rose 1 percent, France's CAC

was up 1.3 percent, while Spain's IBEX

gained 0.7 percent.

JPMorgan Asset Management advised caution over Spanish shares, saying lingering concerns over its banks' bad debts and the likelihood of Spain requiring a bailout meant it was too early for investors to raise their exposure to Spanish equities despite a rebound in the country's stocks.

The IBEX has rebounded 30 percent since touching lows of around 6,000 points in late July, when a pledge by European Central Bank head Mario Draghi to do "whatever it takes" to protect the euro drove a sharp rally in equities worldwide.

(Additional reporting by Sudip Kar-Gupta; Editing by Hugh Lawson)

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

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