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US debt weighs on European equities

London - European shares dipped on Friday, extending a two-week slide as concerns over the US government shutdown and debt ceiling weighed.

As an October 17 deadline drew nearer, investors still expected US politicians to reach an agreement to raise the country's debt ceiling and for equity markets to rebound after a relatively short-lived fall in October.

The pan-European FTSEurofirst 300 index fell by 0.3% to 1 238.28 points in early session trade, while the euro zone's blue-chip Euro STOXX 50 index declined by 0.1% to 2 900.53 points.

Shares in Deutsche Telekom bucked the trend, gaining 1.7% after UBS upgraded its recommendation on the stock to 'buy' from 'neutral'.

The FTSEurofirst 300 hit a 5-year high of 1 274.59 points in late September, while the Euro STOXX 50 hit a 2-year high of 2 955.47 points.

Both markets have risen by roughly 10% since the start of 2013 but have lost ground in October after the US government had to partially shut down this week due to disagreement among politicians over the country's budget.

The budget deadlock has in turn led to concerns about the $16.7trn US debt ceiling, which Treasury Secretary Jack Lew has said the government will hit no later than October 17.

Phoebus Theologites, chief investment officer at investment firm SteppenWolf Capital LLC, said he was expecting equity markets to dip in October but then to rebound back towards the end of the year since he felt the United States would eventually reach an agreement over its debt ceiling.

He added he would look to see if the Euro STOXX 50 fell to the 2,800 point level on the back of falls on the US S&P market, before buying back into the Euro STOXX 50 index.

"I am waiting for a dip that could be driven by the US S&P index," he said.

Theologites sold Euro STOXX 50 'put' options due to expire in December that had bet on a fall in that index as he also felt the possibility that the European Central Bank (ECB) might inject fresh liquidity to markets via its 'LTRO' operation would support European equities.

"Just the mention of another LTRO by the ECB makes everyone feel a little more comfortable in adding on risk," he said.


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