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European shares stay near highs as Spanish sell-off eases

[MILAN] European shares hovered around three-month highs on Tuesday as a sell-off in Spanish stocks eased and financials gained following another record-breaking session on Wall Street.

The pan-European Stoxx 600 index was flat, while Spain's blue chip index added 0.1 per cent as Madrid and Catalonia appeared to carefully weigh their next steps following Sunday's independence referendum, which the central government has declared illegal.

Catalonia's secessionist leader called for international mediation while Spanish Prime Minister Mariano Rajoy said he was seeking a joint response to the crisis after meeting leaders of other political parties.

Catalonia-based banks Sabadell and Caixa traded up 0.3 per cent and 1.5 per cent respectively, having both been hit hard by concerns surrounding Spain's worst constitutional crisis in decades.

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Sabadell and Caixa have the biggest exposure among Spanish banks to private sector loans in the wealthy Catalonia region, while Santander, up 0.6 per cent, and Unicaja, up 1.8 per cent, have the lowest.

Spanish utility Iberdrola fell 1.5 per cent after JP Morgan downgraded the stock to neutral, saying political uncertainty in the euro zone country added to a list of headwinds, even though its Catalan assets are very small.

"We believe that the Catalan conflict adds uncertainty to the Spanish political situation, raising questions about the likely timing of elections... regulatory decisions and the macro outlook," JPMorgan analyst Javier Garrido said in a note.

Garrido also downgraded Red Electrica to neutral, describing the firm as the "best utility proxy of political risk in Spain". Red Electrica shares fell 0.8 per cent.

Growing political worries in Spain have weighed on the euro and pushed Madrid's borrowing costs higher but their effect on European equities has remained confined to Spain so far.

"The euro and peripheral spreads have been hit by events in Spain, but European bourses have made another step towards resistance levels," said Anthilia fund manager Giuseppe Sersale.

Only two months ago the Ibex was the best-performing country benchmark in Europe. Now Italy's FTSE MIB is the front-runner to end 2017 as top gainer, followed by Germany's DAX.

Financials and materials stocks provided the biggest boost to the Stoxx 600, offsetting weaker consumer and healthcare stocks.

Top gainer on the pan-European benchmark was Ferguson, up 3 per cent after the British heating and plumbing products supplier reported a rise in trading profit and announced a share buyback plan.

While Germany was closed for a holiday, Britain's FTSE was down 0.1 per cent, led lower by a fall of more than 2 per cent in BAE Systems after Berernberg downgraded it to hold.

REUTERS