European shares slipped on Friday as investors banked profits after a recent strong run, and some said it was vulnerable to a deeper correction the longer US budget talks remain at an impasse. The FTSEurofirst 300 closed down 0.1 percent at 1,133.36, having dipped 0.4 percent in the previous session following a powerful three-week rally which propelled the index to 18-month highs.
Trading volumes were light, at 81.6 percent of their already weak 90-day daily average. "I think for the markets to be down in Europe today is probably a fairly good guide that they're a little bit tired. They've had a good run and they're just beginning to see a little bit of profit-taking from the high levels," said Andy Ash, head of sales at Monument Securities.
European markets started the day on a mildly positive tack after manufacturing data from China added to evidence of a pick-up in the world's second-biggest economy. But gains were erased as data showed the euro zone recession is deepening as the region's private sector contracted for the 11th straight month in December. And a key issue continued to be worries over the US budget impasse, and whether the United States would miss a year-end deadline to avert the "fiscal cliff" of some $600 billion of tax hikes and spending cuts due to start in January.
A 6.2 percent rally off November lows for the index sends a strong signal that the market believes a deal will be struck. But in seasonally thin trading volumes, any disappointment could trigger significant falls. "Good news about the fiscal cliff is being priced in, hence the risk is definitely to the downside," said Andrew Milligan, head of global strategy at Standard Life Investments, which has 163.4 billion pounds ($263.4 billion) assets under management.
"There is a small but not negligible possibility that there's gridlock in Congress and that could lead in these conditions to really quite sharp moves in markets because the trading going to be so thin. But that really will only become apparent in the last couple of days of trading this year."
The STOXX Europe 600 Oil and Gas index ended down 0.5 percent, among the worst hit sectors, weighed by a bearish note from Barclays in which it cut its recommendation on Total, off 0.7 percent. German carmaker Daimler gained 2.5 percent to add the most points to the FTSEurofirst 300 index. The company has made a push to revive its China sales, and traders said the stock was up on hopes that it could benefit from an improvement in the Chinese economic outlook and outperform its rivals.
Dutch chemicals group AkzoNobel was the top-performing stock on the FTSEurofirst 300, rising 7.1 percent on plans to sell a north American unit to PPG Industries for $1.1 billion. "We see this disposal as a likely trigger event for the stock, removing as it does one of the most troublesome sources of poor returns within the group," Canaccord Genuity analysts wrote in a research note, keeping a "buy" rating on Akzo.