European shares ended lower in thin volume on Tuesday, with investors cashing in on recent highs after a long-awaited bailout deal for Greece failed to dissipate concerns about the future of the euro zone's most troubled country.
While the agreement averted the imminent danger of a disorderly Greek default, further political and growth hurdles in Greece meant the spectre of a messy default, and further regional contagion, was not yet gone.
The FTSEurofirst 300 index <.FTEU3> of pan-European shares fell 0.5 percent to 1,085.38 points, retreating after a two-day winning streak fuelled by expectations the Greek bailout deal was imminent.
Trading was choppy, with volume on the FTSEurofirst at 80 percent of an already-thin 90-day average, suggesting conviction behind the selloff was low.
Today is a classic 'travel and arrive' situation on the Greek deal, said David Mortlock, global head of equity sales at Berenberg Bank.
But, generally, big institutions out there are all increasingly of the view that tail risk is reducing, in which case there is a quite compelling switch from bonds into equities.
The spectre of sovereign defaults in Europe caused investors to ditch equities and seek shelter in safe-haven bonds in the darkest hour of the euro zone crisis.
Equities started to regain ground late last year, helped by upbeat economic data from the United States and supportive monetary policies from central banks worldwide, most notably including a liquidity injection by the European Central Bank.
Mortlock said investors looking for cyclical exposures were favouring basic resources stocks, seen benefiting from a less restrictive monetary policy in top metal consumer China, over banks, facing a tougher regulatory environment and direct exposure to the euro debt crisis and sluggish economy.
Among defensives, he said buyers' eyes were on the healthcare sector, which offered a dividend yield of nearly 4 percent and could count on strong cash generation to support its payout. <.SXDP>
Healthcare was the only sector to close above the gain line on Tuesday, up 0.2 percent after missing out on the recent rally, driven by cyclicals such as banks and miners.
The world's largest dialysis specialist, Fresenius Medical Care
Basic resources stocks outperformed other cyclical sectors, shedding a mere 0.2 percent as China's recent move to ease its banking reserve requirements supported metal prices.
Asset returns in 2012: http://link.reuters.com/nyw85s
Euro zone debt crisis in graphics: http://r.reuters.com/hyb65p
Portugal, Italy and Ireland bond spreads: http://link.reuters.com/mac36s
While other classic cyclicals fell prey to profit takers after recent gains, with travel & leisure <.SXTP> and industrials <.SXNP> shedding 1.4 percent and 1.1 percent respectively, fund managers and strategists remained sanguine about the market's mid-term prospects.
Cheuvreux reiterated its cyclical bias on European blue chips, highlighting signs of recovery in the European credit markets as well as moves by central banks in emerging markets.
We still want to 'buy the dips' at this time, Cheuvreux said in a note. The bear squeeze is not yet complete.
The French bank, however, recommended hedging part of that cyclical bias with an exposure to small-cap defensive stocks, arguing they were set to catch up with a recent rally in their cyclical peers.
(Editing by Helen Massy-Beresford)