European shares fell on Monday, led lower by shares in Portugal, where an agreement between leftist parties to work together to form a government unnerved investors. Portugal's PSI 20 index fell 4.1 percent, underperforming a 1.1 percent drop for the FTSEurofirst 300, which closed at 1,482.21 points. Two small far-left parties have concluded talks with the moderate Socialists to create an alternative government and oust the centre-right, whose prime minister-designate acknowledged he could be forced into opposition.
The would-be partners reject some of the reforms imposed to help Portugal escape a debt crisis. Portuguese sovereign bond yields reached a four-month high, with banks bearing the brunt of the stock sell-off. Banif fell 10.7 percent and Banco Comercial Portugues dropped 9.5 percent. "Whiffs of crisis seem to be returning to Portugal ... but we maintain a constructive outlook for the medium term," strategists at Credit Suisse said in a note.
"Any market volatility created by Portugal's political situation should be, however, contained, thanks to QE and to the presence of European monitoring. Moreover, Portugal is no longer in an extreme economic and financial situation." The FTSEurofirst 300 sharply extended falls in late trade, dropping in line with US indexes after Wall Street opened. Germany's DAX fell 1.6 percent, while France's CAC dropped 1.5 percent. However, the indexes have seen a double-digit rally since lows hit in September, buoyed by the prospect of further stimulus from the European Central Bank, although uncertainty remains over a possible rate increase in the United States.
"We find the fundamental market backdrop still supportive for global equities. Within this, the growth/policy trade-off favours eurozone over the US, in our view," strategists at J.P. Morgan Cazenove said in a note. Outside Portugal, German auto parts maker Continental was a top faller after missing earnings expectations, although it raised its full-year outlook. The shares dropped 5.3 percent.
The muted mood in autos spread to Renault, down 3.5 percent after French Prime Minister Manuel Valls said on Sunday the French government did not want a merger between the car maker and its Japanese partner, Nissan. Atlantia fell 4.5 percent after the Italian operator of highways and airports said it had broken off talks with international investors to sell a minority stake in its Rome airport unit. The German airline Lufthansa fell 3.1 percent after announcing hundreds of flight cancellations due to a strike. Telecoms equipment maker Ericsson rose 1.9 percent, the top FTSEurofirst 300 riser, after agreeing a partnership with networking group Cisco Systems that is expected to generate revenues of $1 billion for each company by 2018.
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