Deutsche Bank drags European shares towards worst weekly loss since August

By Danilo Masoni

MILAN (Reuters) - European shares were set for their biggest weekly loss in six months on Friday as a slump in Deutsche Bank (DBKGn.DE) on a disappointing update dragged the heavyweight banking sector lower after a strong start to the year.

A more than 5 percent drop in shares of the German lender and losses in most sectors dragged the pan-European STOXX 600 (.STOXX) index down 0.8 percent by 0944 GMT, set for its fifth straight session of declines. Germany's DAX (.GDAXI) fell 1.2 percent and the UK's FTSE (.FTSE) dropped 0.4 percent.

The STOXX is down 2.6 percent so far this week, its biggest weekly loss since August, pushed lower by rising bond yields on expectations of tighter monetary policy and a strengthening euro, partly erasing gains in January on optimism over global economic growth.

"The stock market cannot always go up and multiples are very high. The least bit of dust can gum up the works. European equities are weighed down by extreme strength in the euro as the market prices in future changes to monetary policy," said Marco Vailati head of research at Italy's Cassa Lombarda.

Vailati said European shares were more vulnerable than their U.S. peers to possible pull back because earnings growth expectations were stable, whereas those for U.S. companies were being revised upwards thanks to measures there to cut taxes.

The banking sector (.SX7P), which benefited at the start of the year from a rotation into cyclical stocks, fell 1 percent, also weighed down by declines of around 4 percent in Spanish banks Caixabank (CABK.MC) and Sabadell (SABE.MC) following their quarterly updates.

"Both CaixaBank and Sabadell results look a little disappointing. Fourth-quarter numbers decidedly mixed for both, but the guidance towards a brighter outlook may offer partial support," said Jefferies analysts.

Deutsche Bank fell as much as 6.4 percent to its lowest level since November. It posted its third consecutive annual loss in 2017, taking a hit from challenging markets, a drop in investment bank revenue and a U.S. tax reform, after a difficult fourth quarter.

"Deutsche Bank's figures give a mixed picture: offsetting the impact of the U.S. tax reform, the figures were in line with expectations or even slightly better, but the downside is that the bank is losing market share," said Ruland Research market analyst Heino Ruland.

Nokian Tyres (NRE1V.HE) fell 7.2 percent following weak Russian sales figures, while AstraZeneca (AZN.L) declined 1.4 percent after the drugmaker predicted an increase in 2018 drug sales at a low single-digit percentage rate.

BT Group (BT.L) fell 3.9 percent after Britain's biggest broadband and mobile provider broadly met market forecasts with a 25 percent rise in third-quarter pretax profit and said it remained confident about its full-year outcome.

Capita (CPI.L) was the biggest gainer on the STOXX, up 4.7 percent, as the British outsourcer rebounded from heavy losses that followed its profit warning on Wednesday.

(Reporting by Danilo Masoni; additional reporting by Hakan Ersen in Frankfurt; editing by Andrew Roche)