Wires

European shares trade in tight range, uptrend intact

Share

* FTSEurofirst 300 index falls 0.3 percent

* Cyclical shares up, uptrend seen intact

* HSBC becomes "overweight" Spanish equities

By Atul Prakash

LONDON, Oct 12 (Reuters) - European shares edged lower onFriday on concerns about poor earnings, although analysts saidthe market's overall uptrend remained intact as economicindicators were improving and valuations remained attractive.

The third-quarter reporting season started earlier this weekin the United States, with firms like Chevron

and Alcoa

disappointing. Alcoa posted a quarterly loss and cut itsoutlook for global aluminum demand, citing a slowdown in China.

Consensus estimates show European earnings falling 4 percentin 2012 from a year earlier, against a growth of 5 percentpredicted 6 months ago and about 13 percent rise forecast inmid-2011, but some analysts said the situation was not that bad.

"We are not expecting any great surprises from the earningsseason, but feel that people are getting too pessimistic on theoutlook for corporate earnings," Robert Parkes, equitystrategist at HSBC Securities, said.

"Our call is that recession in Europe is likely to be ashallow one and not a deep one and on that basis, we don't see acollapse in corporate earnings. This should in turn put thespotlight on valuations, which are still at a very attractivelevel. We see a lot of upside potential for the market."

The STOXX 600 index

now trades at 11.9 times its12-month forward earnings, against 13.8 times for the U.S. S&Pindex

, according to Thomson Reuters data.

Analysts said the market was looking for catalysts to movesharply higher. The FTSEurofirst 300

has hovered in aband of about 50 points in the past two months, against around100 points in June and July. At 1142 GMT, the index was down 0.3percent at 1,096,05 points, but is up 15 percent since June.

Investors had started looking at beaten-down stocks to takeadvantage of a potential rally, analysts said.

Parkes said HSBC changed its stance on Spain to "overweight"this month from "neutral" following an easing of financialconditions in the euro zone and as domestic exposure of Spanishcompanies was relatively low. Valuations were very attractivethe country had started to see momentum indicators picking up.

Analysts said Spain was likely to ask for an internationalbailout, however it was difficult to gauge the timing. Europeanequities were expected to witness some volatility in the shortterm, but the focus should be on Spanish bonds yields which hadcome down significantly, they added.

Spain's benchmark IBEX share index

outperformed thewider market and was last up 0.4 percent. Spanish bond yieldsfell further to 5.7 percent on Friday, despite a downgrade tothe country's credit rating this week, from a high of nearly 7.5percent in late July.

SHORT-TERM VOLATILITY

The market had paused for breath after a summer rally andthe risk appetite was still low, analysts said, adding that alot of investors were hoping for a sharp sell-off to move backinto the market, but that did not materialise.

"Perhaps the closer we get to the year end, the morepressure will be on investors to put more risk into theirportfolios," Parkes said, adding he was "overweight" Europeanfinancials.

Cyclcial sectors outperformed the market on Friday, withbanks

rising 0.5 percent, technology

up 0.4percent and insurersgaining 0.5 percent.

Graham Bishop, senior equity strategist at Exane BNPParibas, said equity valuations were still supportive and he wassticking to his pro-cyclical bias.

The market was in a holding pattern after a good summer runand was looking for catalysts such as more clarity on the U.S."fiscal cliff" of spending cuts and tax rises to break thecurrent trading range, he added.

Deutsche Bank strategists were also bullish. They advised ina note to buy European financials, highly-leveraged high yieldand domestic exposure saying: "Now's the time". They said theywere returning to being tactically 'overweight' on the broaderSTOXX 600 index

.

The euro zone's blue chip Euro STOXX

fell 0.1percent to 2,485.72 points. Charts showed the index hadpotential to bounce back.

"The uptrend, which has been in place since early June, isintact and the bias is still to the upside, but the key level towatch on the upside is 2,600," Tim Parker, technical analyst atWesthouse Securities, said.

Among individual movers, Italian oil services company Saipem

fell 5.1 percent after Nomura cuts its stance on thestock to "neutral" from "buy" and lowered its price target to 39euros from 43 euros.

(Additional reporting by David Brett; editing by Ron Askew)

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

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