European equities edged lower on Monday, with optimism on the completion of a Greek debt swap quickly giving way to concerns about borrowing levels in other parts of the region, such as Spain, sparking a sell-off in bank shares. The FTSE Eurofirst 300 index closed down 0.2 percent at 1,077.10 points.
The benchmark Madrid index underperformed, falling 1.2 percent, as Spain braced for tough words from euro zone officials meeting late on Monday, after announcing it would not meet the agreed deficit goal for this year. Greek debt woes remained firmly on the radar despite last week's bond swap, with Monday's euro zone meeting set to sign off on its bailout and the International Monetary Fund due to determine its participation later in the week.
"The risks factors are ahead of us and ... we have a market which has already reached our year-end objectives," Sylvain Goyon, head of pan-European equity market strategy at Natixis in Paris, said. "There is no fuel in the short to mid-term to aggressively buy into the market, which is why we are cautious. The broad STOXX 600 index closed down 0.2 percent at 264.87 points, trimming its year-to-date gains to 8.6 percent and holding above the Natixis end-2012 target of 263.
Underlining investor concerns, yields on safe-haven 10-year German government bonds hit two-month lows, while yields in Spain and Portugal - which has been bailed out once - rose. The Lisbon equity market fell 1.5 percent while the Greek bourse was down 2.5 percent. In contrast, Britain's FTSE and France's CAC 40 added around 0.1 percent, while the German DAX rose 0.3 percent.
On a sectoral level, banks, which have the most direct exposure to sovereign debt, lost 1.2 percent. Royal Bank of Scotland and Barclays - which are among the five most volatile stocks in the FTSE Eurofirst according to the beta measure - fell 3 percent and 2 percent respectively.
The other major underperformer was the basic resources sector, whose fortunes are closely tied to global economic growth and the price of oil and metals such as copper, which fell on Monday. Data over the weekend showed Chinese exports grew much less than expected in the first two months of the year as demand dropped in Europe, where data confirmed that Italy's economy was in recession.
Heavyweight miner Rio Tinto fell 1.7 percent, while Royal Dutch Shell was down 0.8 percent. "The market is almost waiting for some poor US macro (data) as an excuse to sell off, but until that happens we will probably trade sideways," Dominic Lowres, head of large-cap cash trading at Liberum Capital, said.
Charts supported his view, with the blue chip Euro STOXX 50 index closing at 2,514.97, trapped in no-man's land and with volume at just 76 percent of the 90-day moving average. A close above 2,530 would open the door for a possible recovery towards seven-month highs set in February, said Dmytro Bondar, technical analyst at RBS. On the flip side, the chances of a more convincing sell-off would have increased if it had ended the session below 2,491.
"Today we didn't get any meaningful close, so we still have a very narrow range. We need to see a big move to the downside or to the upside in order to be sure whether the pattern will come into force," Bondar said. Investor flows are also inconclusive, with retail investor redemptions from European equity funds falling to their lowest since last spring, but the asset class as a whole continuing to see net outflows, according to weekly EPFR data.