You're reading: European shares fall on French auction worries

European shares fell on Thursday morning ahead of a French government bond auction that could dampen equity market sentiment if it fails to draw solid demand, as well as concerns about more capital raising in the banking sector.

The pan-European FTSEurofirst 300 index of top shares was down 0.4 percent at 1,017.62 points at 0915 GMT, after falling 0.6 percent in the previous session on concerns about capital raising in the bank sector.

Banking stocks were the main drag on Thursday, with the STOXX Europe 600 Banks index down 2 percent on worries about the need for more capital raising in the sector following UniCredit’s pricing of its rights issue on Wednesday.

French bank Societe Generale, which has large exposure to Italian debt, fell 4.6 percent, making it one of the worst performers.

Although solid demand was expected at France’s 10-year bond auction, the country’s triple-A credit rating is under threat and a downbeat result could worry investors that its top-notch rating will be lost.

"We would like a low yield and reasonable coverage in the French bond auction and if the market does not get that it will probably get spooked," said Andrea Williams, who manages $2.1 billion in assets for Royal London Asset Management.

"There are worries that France could lose its AAA rating which would knock investor sentiment. Our portfolios are still fairly defensive, there will be further capital raising by banks and it is all pretty negative."

France is seen at risk of contagion in the euro zone debt crisis and its slowing economy, high structural deficit and banking exposure to the euro zone’s periphery has put pressure on rating’s agencies to review the country.

"A downgrade would be the next step towards the slippery slope for France as it would cause their borrowing costs to spike and making their job of getting the house in order even more difficult," said Simon Denham, chief executive officer at Capital Spreads.

Next week will see a test of investor appetite for Italian and Spanish debt.