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Europe: Shares end week with a gain; banks volatile on rate talk

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[LONDON] European shares edged higher on Friday, though weaker auto stocks euro zone banks weighed.

The latter had hit a fresh 15-month high but fell back after a European Central Bank policymaker rekindled talk of a possible rate hike.

Ewald Nowotny said the ECB would decide at a later date whether to raise interest rates before or after ending its bond purchasing programme, pushing euro zone government bond yields higher.

He said the ECB could hike its below-zero remuneration of bank deposits before the main rates at which it lends to banks.

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Traders said his comments sparked an early rally in bank stocks but the sector turned lower later. The Stoxx 600 nevertheless ended up 0.2 per cent with a 1.4 per cent gain for the week.

Money markets showed at one point an 80 per cent chance the ECB would lift its deposit rate in December, up from 60 per cent a week ago.

Rabobank analysts said Mr Nowotny's comments had been over-interpreted, even though they could not rule out the possibility of the ECB tightening policy before ending its asset-buying.

The euro zone bank index rose as much as 1.4 per cent before paring gains and ended the session down 0.1 per cent, weighed by losses in Erste Group Bank, ABN AMRO Group and Deutsche Bank, which all fell between 1.5 per cent to 1.9 per cent.

Europe's broader bank index reversed course to fall 0.6 per cent, weighed down by Nordea Bank going ex dividend and trading 6.3 per cent lower. In spite of the volatility, some investors were upbeat about prospects for the sector, whose margins have been squeezed by ultra-easy central bank policy.

"I think Nowotny and a lot of the regulators and central bankers realise that negative interest rates have been a disaster for the economy and they're going to get more positive," said David Hussey, head of European equities at Manulife Asset Management in London.

"There is a good short-term trade in banks and there is a medium- to long-term buy case for European financials generally as regulation and the economy improves," he added.

Autos also fell, dropping 0.5 per cent.

Top fallers in the auto sector included German carmakers Porsche, Volkswagen and BMW, down between 0.9 per cent and 1.9 per cent.

Elsewhere, Tullow Oil plunged 14.7 per cent, the biggest faller on the Stoxx 600 index, after the British oil services company announced a 607 million pound share sale to reduce its debt.

But London-focused housebuilder Berkeley Group rose 6.1 per cent to its highest level since Britain voted to leave the European Union, as investors cheered full-year forecasts at the top end of market estimates.

German airport operator Fraport rose 4.8 per cent, also boosted by well-received 2017 guidance.