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Europe: Stocks end July on back foot as earnings sentiment dampens

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[LONDON] Weakness among tobacco stocks and some broker downgrades weighed on European shares, sending them lower on the final trading day of July as analysts dissected what was beginning to look like an "underwhelming" earnings season.

The pan-European STOXX 600 index was down 0.1 per cent while euro zone stocks and blue chips fell 0.3 to 0.4 per cent. Britain's commodity-heavy FTSE 100 index held on to 0.1 per cent gains while France's CAC 40 underperformed, hitting its lowest in three months.

Stocks retreated as financials became a drag on the main European indexes. HSBC ended 1.9 per cent higher, however, after posting a forecast-beating 5 per cent rise in first half pretax profit and announced its third buyback in a year.

As the European second-quarter earnings season gathers pace, around 46 per cent of MSCI Europe firms have reported results, 59 per cent of which have either met or beaten analysts' expectations, according to Thomson Reuters data.

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This figure is slightly lower for euro zone companies. Just over half of them have met or beaten expectations.

"Compared to the record-breaking Q1 earnings season, Q2 results thus far appear underwhelming," said Barclays strategists. "Reflecting this, the median stock has performed only in line with the markets on results day," they said, adding that companies which missed expectations were harshly punished by investors.

The STOXX 600 ended the month 0.4 per cent lower, hampered in July by a stronger euro which has weighed on euro zone firms, especially exporters. It was the second consecutive month of losses for the pan-European index.

Consumer goods were the top drag on the benchmark on Monday, down 1.1 per cent as cigarette makers extended losses on a regulatory clampdown in the US.

British tobacco firms Imperial Brands and British American Tobacco extended losses from the previous session, down 5.8 per cent and 4.7 per cent respectively following Friday's sell-off after the US Food and Drug Administration proposed cutting nicotine in cigarettes.

France's blue-chip index fell 0.7 per cent, hitting its lowest since April 24, when the first-round victory of Emmanuel Macron in the presidential race boosted stock markets.

French power switch and socket maker Legrand was the worst-performing, down 4.2 per cent after disappointing first-half results.

Essilor also fell 4 per cent to a five-month low, dragging on Italian merger partner Luxottica, after brokers Natixis and Invest Securities cut their price targets on the French lens maker.

Mining firms were a boost as copper prices rose on the back of manufacturing data from China, the world's biggest consumer of metals.

Shares in Spanish supermarket chain DIA fell 5 per cent, weighed by broker downgrades as analysts adapted their estimates after sharp gains in the stock when LetterOne investment trust took a stake in the firm on Friday.

"Post LetterOne taking a stake in DIA last week, DIA's share price appreciated significantly. Risk/reward is now clearly more skewed to the downside," said Morgan Stanley analysts.