European shares up ahead of summit, defensives gain
* FTSEurofirst 300 index rises 0.4 percent
* Defensive shares in demand, utilities up
* Cautious ahead of key EU summit this week
By Atul Prakash
LONDON, June 27 (Reuters) - European shares gained on Wednesday, with some investors closing their short trading positions ahead of this week's European Union summit to protect themselves from possible losses in case of a positive annoucement.
Investors stayed jittery as differences between leaders persisted ahead of the June 28-29 summit, with German Chancellor Angela Merkel saying on Tuesday Europe would not share total debt liabilities "as long as I live".
At 1033 GMT, the FTSEurofirst 300 index of top European shares was up 0.4 percent at 990.19 points, after falling nearly 3 percent in the past four sessions on fading hopes the summit would deliver bold measures. But reduced expectations also lowered the bar for a positive surprise.
Investors snapped up July 'call' options - the right to buy into the market at a pre-set price and thus benefit from any rally - on the euro zone bluechip Euro STOXX 50.
For the July contract, some of the heaviest activity has been in the 2,250 contract, implying investors are betting the Euro STOXX 50 will rise by more than 5 percent in the coming three weeks from around 2,135 on Wednesday.
"The exposure hedge funds have is very low. A lot of them are running books of 20 percent and 80 percent cash. So the only risk they have is that market starts going up," said the head of sales at Monument Securities Andy Ash.
"I think the expectations are low enough that the market can probably do ok. I don't see anything that can come out of it that is going to disappoint the market more than the disappointment the market is already expecting."
The summit could agree on a growth package pushed by France in infrastructure project bonds, reallocated regional aid funds and European Investment Bank loans, but investors want to see bold moves to underpin the European currency union and halt the contagion from one debt-stricken country to another.
"Much of the EU summit agenda seems to have been leaked prior to the meeting and recent reactions to these proposals have been greeted by Merkel with a lack of enthusiasm. We feel that half measures at the summit will not be enough now. A lack of action could test the lows seen in September 2011," James Butterfill, global equity strategist at Coutts, said.
A low of 853.02 in September last year would be a fall of more than 13 percent from the present levels, charts showed.
"As it is challenging to time the markets at present due to such uncertainty surrounding political events, we have a longer term investment approach, focusing on defensive assets with a positive real yield," Butterfill said.
Utilities, traditionally seen as defensive shares, rose 1.2 percent to top the gainers list, while both healthcare and food sectors rose 0.7 percent. Cyclicals like Chemicals and miners fell 1.2 percent each.
Some analysts said those investors, who had bet on a drop in share prices, might be closing their short trading positions to protect themselves from possible losses in the event of a market rally.
"If you are short and you have made some money, you do not want to run the risk of some positive outcome from the summit. That explains why sentiment is slightly positive today," Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets, said.
Gijsels said the market would like to see a road map and some consensus between Germany and other countries on key issues. That, along with a possible liquidity injection by central banks, would be a boost for the market, which could rise 3 to 5 percent in a short span of time.
A disappointment could lead to a repeat of the last summer and that could force European policymakers to come up with some solution to resolve the crisis and central banks to step in again, analysts said.
The FTSEurofirst 300 index fell more than 20 percent since early July to late September last year.
Asset allocation strategists at Deutsche Bank closed their underweight on European equities ahead of the summit, turning neutral and seeing scope for the leaders "to agree on a longer-term road map for European integration".
"Expectations are fairly low and any positive surprises are likely to fuel outperformance," they said in a note.
Among individual movers, Colruyt was up 11 percent after rising to an eight-month high as the Belgian supermarket chain reported a rise in full-year net profit, against expectations of a decline.
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