European shares fell on Thursday, with banks among leading losers and Air France KLM nosediving on news it was in exploratory merger talks with ailing Italian airline Alitalia, according to Reuters. Robust German business-confidence indicators increased the likelihood of more monetary tightening by the European Central Bank (ECB), and the euro firmed, denting prospects for European exporters. The FTSEurofirst 300 index closed unofficially at 1,462.50 points, down 0.24 percent. Volumes were lighter than usual due to holidays in Japan and the United States. Analysts' views on the outlook were mixed after a year which has seen Europe's top-300 index fell 2.2 percent after Citigroup downgraded the stock to "hold", citing the French bank's weaker-than-expected revenue trends in domestic retail banking, asset management and insurance. HBOS and CS Group each fell 0.9 percent. Santander dropped 0.8 percent, while Royal Bank of Scotland and Fortis both eased 0.6 percent. Air France KLM fell 6.5 percent as investors used in-line quarterly earnings and an announcement it was in exploratory merger talks with Alitalia as reasons to book profits on a stock that has rallied nearly 90 percent in the past four months. ICI rose 2.8 percent to 435 pence a day after news the UK chemicals firm would sell its Quest unit to flavours and fragrances maker Givaudan for $2.3 billion. For ICI, the deal had "an excellent exit multiple" of 15 times 2006 gross profit (EBITDA), Deutsche Bank said. It raised its target price for ICI to 475 pence from 440 pence. "While there is now some acquisition risk attached to ICI this is more than offset by the possibility of ICI itself now becoming a bid target," Deutsche Bank said. ICI's sector peer BASF put on 2 percent and chemicals were the day's top performer with a 0.9 percent advance on the DJ EuroStoxx sector index. Givaudan shares rose 2.3 percent to 1,095 francs, building on Wednesday's 6.7 percent rise sparked by the Quest deal. "Givaudan is ... realising a major strategic transaction without destroying value," said Lehman Brothers, which rates the stock "Overweight" with a fair value of 1,100 francs. HVB upgraded Givaudan to "Outperform" from "Neutral" and raised its price target to 1,160 francs from 985 francs. Imperial Tobacco gained 1.8 percent after the top European Union court ruled that individuals must still pay duty on tobacco in their own country even if they order the product from another EU state. Vodafone, the day's most traded stock by volume, put on 1.1 percent to 135 pence. Citigroup raised its target price to 147 pence from 143 pence. "The market has suddenly become comfortable that the news in Western Europe is not deteriorating further. We agree," Citigroup said in a note on Vodafone. Clive McDonnell, chief European strategist at S&P equity research, said investors were hoping for private equity groups to drive consolidation in the telecoms industry. "This is likely to encourage investors to increase exposure to telecom stocks, which have recently started to recover following two years of underperformance," he said. Germany's Ifo index of business confidence rose in November, equalling June's 15-1/2-year high, and separate data showed that the upswing in Europe's largest economy had broadened in the third quarter. "All these data are bound to fuel the arguments of ECB hawks that with the main economy of the euro zone back on track, some additional (rate) hikes are warranted," Bank of America said. Bear Stearns said, "This should vindicate the ECB's view that the euro zone recovery should withstand rates going higher next year, possibly to a 4.0 percent target." Most economists expect a quarter-point rate increase to 3.50 percent next month. ECB Governing Council member Miguel Angel Fernandez Ordonez said on Thursday that inflation risks were on the rise and interest rates still favourable for growth. The euro-dollar cross hit a 5-1/2-month high of 1.2975 and was at 1.2945 at 1630 GMT when Europe's stock markets closed. Goldman Sachs saw "major resistance" at $1.2980 and said a push above 1.30 could lead to much more dollar selling. "In particular longer-term players could then get involved."
