European shares edge higher; gains seeen capped

* Tech shares in demand on upgrades, automakers skid

* Technical analysts see limited upside in near term

By Atul Prakash

LONDON, March 28 (Reuters) – European shares inched higher
on Monday after strong gains in the past week, with investors
pausing for breath on uncertainties over unrest in the Middle
East and Japan’s unresolved nuclear crisis.

Traders said some of the big long-only players were selling
shares while technical analysts said further upside for equities
were limited in the near term.

At 1148 GMT, the FTSEurofirst 300 (.FTEU3: Quote, Profile, Research) index of top
European shares was up 0.1 percent at 1.126.14 points after
gaining 3.3 percent last week. Trading volumes were just 28
percent of its 90-day daily average.

Technology shares were among the top gainers, with Nokia
(NOK1V.HE: Quote, Profile, Research) and Alcatel-Lucent (ALUA.PA: Quote, Profile, Research) rising 2.9 percent and
6.7 percent respectively after Goldman Sachs upgraded its
investment rating on both shares to “buy” from “neutral”.

“We still think there is a strong potential for equities
this year but it all depends on how the two big upsets, that
have held the market back in the first quarter, pan out,” said
Lothar Mentel, chief investment officer at Octopus Investments,
which manages $3.7 billion.

“In the Middle East, it’s encouraging to see (Muammar)
Gaddafi losing power, but it’s worrying to see what’s happening
in Syria. And the oil price at the moment is the biggest
potential headwind to this global recovery.” [ID:nLDE72R0TL]

Analysts said that average price-to-earnings ratios for
equities in the developed world had fallen, but valuations gave
little support because of uncertainties related to the political
situation in the Arab world, an expected increase in interest
rates and a debt crisis in peripheral euro zone countries.

FOCUS ON PERIPHERALS

Portuguese government bond yields hit euro-era highs after
Standard & Poor’s cut the credit ratings of five of the
country’s banks. [ID:nLDE72R0XM] [ID:nLDE72R0LJ]

In Germany, government bonds fell after a state election
rout for Chancellor Angela Merkel’s conservatives and with the
ECB putting the finishing touches on a new facility that will
give troubled euro zone banks liquidity over a longer timeframe.

Across Europe, Ireland’s ISEQ (.ISEQ: Quote, Profile, Research) was up 0.8 percent,
while Spain’s IBEX (.IBEX: Quote, Profile, Research), Portugal’s PSI 20 (.PSI20: Quote, Profile, Research) and
Italy’s FTSE MIB (.FTMIB: Quote, Profile, Research) were flat to 0.3 percent higher.

“We think long Italy and short Spain is an interesting pair
trade. Relative five year underperformance, big valuation
discount, lower private sector leverage and lower relative
fiscal drag all point to a preference for Italy,” J.P.Morgan
Cazenove said in a note.

It recommended buying a Dec. 11 call on the FTSE MIB, funded
by selling a call on the IBEX.

Technical analysts were bearish in the near term saying that
further upside for the FTSEurofirst 300 could be limited.

“Traders should still be concerned that the uptrend which
began more than two years ago has been decisively broken and the
index remains well below its 50-day moving average,” said Bill
McNamara, technical analyst at Charles Stanley.

“This moving average, the uptrend and a key Fibonacci
retracement level all converge at around 1,145, making that the
level to watch for now.”

Automakers were the biggest decliners, with the sector index
(.SXAP: Quote, Profile, Research) down 1.4 percent, weighed by uncertainty over the impact
of Japan’s nuclear crisis on global supply chains and after
Porsche (PSHG_p.DE: Quote, Profile, Research) planned a 5 billion euro ($7.03 billion)
capital hike. Porsche fell 2.8 percent.

(Additional reporting by Brian Gorman; Editing by David
Cowell)

European shares edge higher; gains seeen capped