European shares fell on Tuesday, hit by weakness among banking stocks and Volkswagen, whose shares retreated after the carmaker reported first-quarter earnings. The pan-European STOXX 600 and FTSEurofirst 300 indexes both closed down around 0.8 percent, although they made their third consecutive month of gains and had their best month since last November. VW fell 2.6 percent and was weighing on rivals such as Renault and Daimler, although the carmaker posted a surprise increase in first-quarter operating profit and is pushing ahead with steps to overcome a scandal over rigging diesel emissions tests.
Europe's biggest automaker is counting on a deal with US authorities and car owners next month over the rigged test while pushing a strategic overhaul across its 12-brand group. But some analysts said VW was not yet free of the effects of its emission woes. "As we still expect additional burdens related to Dieselgate in 2016, we stick to our sceptical view on VW," said DZ Bank analyst Michael Punzet. The STOXX 600 Bank index was down 1.6 percent, the worst performance by a sector. Italy's UniCredit, Spain's Sabadell and Switzerland's Credit Suisse all fell 2.6 to 4 percent.
In a note on Tuesday, J.P. Morgan reiterated that banks could unwind some prior losses, but it added that stronger economic growth was needed for the sector to perform sustainably. Traders said Italian banks were further hit by uncertainty over the listing of Veneto Banca and concerns that the country's bank rescue fund might have to step in. Among stocks outperforming the market was steelmaker ArcelorMittal, which rose 3.8 percent after Rabobank raised its rating on the stock to "hold" from "reduce."
European equities have had an element of support of late from the euro's relative weakness against the US dollar, which typically helping European exporters. The dollar has risen over the last week after Federal Reserve Chair Janet Yellen said a US rate increase in coming months would be "appropriate" if the US economy and jobs market continued to improve.
But on Tuesday the dollar was mostly flat against a basket of major currencies as US economic data failed to support expectations for a June or July rate increase. Some fund managers remained cautious on the near-term outlook for equities, given uncertainty over US interest rates and next month's vote in Britain over whether to stay in the European Union. "We remain underweight on equities," said Francois Savary, chief investment officer at Geneva-based fund management and consultancy firm Prime Partners.