STOXX 600 slips as French rating review looms; still ends week higher

By Johann M Cherian and Tristan Veyet

(Reuters) - European shares ended the week on a strong note but were a little lower on Friday as investors turned cautious ahead of Fitch's credit rating decision on France later in the day.

The pan-European STOXX 600 ended 0.11% lower at 554.74 points, as healthcare led sector losses with an over 1% drop.

Swiss pharmaceutical company Novartis lost 2.8% after Goldman Sachs' downgrade, citing rising competition from generics. Its peer, Zealand Pharma also dropped 4.1% in sympathy.

European aerospace and defence stocks extended their record-setting run, up 0.7% on Friday to a new high. The index was the top performer for the week, surging 6% to its biggest weekly rise in more than four months as it leveraged simmering geopolitical tensions after Poland shot down a possible Russian drone.

"The incursion of Russian drones into Polish airspace this week has been met with deep concern. At the very least, it will support policymakers' efforts to continue raising spending on defence," Liam Peach, senior emerging markets economist at Capital Economics, said in a note.

Banks jumped about 4% for the week, staging a rebound after weakness in late August.

The benchmark STOXX 600 index was poised for its first gain in three weeks, up 1%. The move was inspired by global equities, which firmed this week on expectations of multiple U.S. interest rate cuts. Traders have fully priced in a Federal Reserve cut next week, according to the CME Group's FedWatch Tool.

The European Central Bank left rates unchanged on Thursday as expected, but its upbeat view on growth and inflation dampened expectations for further easing.

The focus this week was also on French political chaos after the country appointed its fifth prime minister in under two years, as the minority government failed to unite parliament over plans for debt-fuelled fiscal spending.

French bond yields, which jumped sharply last week on concerns about the economy's high debt, face another test later on Friday as Fitch is expected to downgrade France's credit rating.

France's 30-year bond yields was up 4.6 bps to 4.327% on the day.

However, French stocks rose about 2% for the week, outperforming the STOXX index.

"The French market remains at a meaningful discount to the global market. There is certainly some discount priced in for political challenges and budget problems. The other point is that (French companies) have a very international market and so their direct France exposure is quite small," said Craig Cameron, portfolio manager at Templeton Global Equity Group.

Among other stocks, French voucher providers Pluxee NV and Edenred dropped 6.3% and 6.4%, respectively, following a report on a potential 8% tax on lunch vouchers.

British online supermarket and technology group Ocado tanked about 20%, the day's worst performing stock, after U.S. partner Kroger flagged it will review its warehouse investments.

(Reporting by Tristan Veyet in Gdansk, Johann M Cherian in Bengaluru; Editing by Eileen Soreng, Harikrishnan Nair and Richard Chang)