Euro Worries Pressure European Markets

Lingering worries over the euro zone's sovereign debt crisis pegged back European equities on Tuesday following a recent sharp rally and pushed investors towards relatively defensive equity sectors such as food and energy stocks.

The pan-European FTSEurofirst 300 index fell 0.1 percent to 1,114.51 points, while the euro zone Euro STOXX 50 index declined by 0.4 percent to 2,546.79 points.

European equity markets have rallied since July 26 on ECB President Mario Draghi's pledge to protect the euro, given flesh in a Sept. 6 plan to buy government bonds.

However, the euro fell on Tuesday on a German media report that Bundesbank lawyers were checking the legality of the ECB's bond-buying plan. Spanish bond yields inched up, as markets fretted over Madrid's delay in requesting a bailout.

"We took profits on bonds and equities. The Draghi rally is not a blip but it will not be one way. There's still plenty of bad news to come. Bunds look much cheaper now and are not a bad place to park some money," said Integrated Asset Management head Emanuel Arbib.

Others were more sanguine, arguing that any pull-back on the European stock markets would be a relatively limited one, with the Euro STOXX 50 index still up by around 20 percent since Draghi's July speech.

JN Financial investment manager Edward Smyth said Germany's benchmark DAX index, which was down 0.3 percent at 7,387.60 points, was more likely to rise to 7,500 points in the near term than fall back to the 7,300 point level.

"If the DAX breaks through the 7,420 or 7,422 level, I'll take up a 'long' position on it," he said, with other traders adding that German export-led companies could benefit from a low euro exchange rate.


German sugar refiner Suedzucker was the best-performing FTSEurofirst 300 stock, rising 2.8 percent after it increased its sales and earnings targets.

British drinks group Diageo also rose 1.9 percent as analysts welcomed the company's plans to buy a stake in United Spirits of India.

Among the fallers, German automotive supplier Continental AG fell 4.4 percent after shareholder Schaeffler sold Continental shares for 77.50 euros for around 1.6 billion euros.

Expectations that the equity rally might have run its course were highlighted by the fact that the defensive food and beverages sector was the best-performing one in Europe. It rose 0.7 percent and outperformed declines on the banking and mining sectors, which are more dependent on the economic growth cycle.

Central Markets senior broker Joe Neighbour said he saw European markets holding onto much of their recent gains, adding that he did not expect any fall on Germany's DAX to go much beyond 7,250 from its current level of around 7,400 points.

Richard Griffiths, associate director at Berkeley Futures Ltd, recommended using equity market dips to buy up stocks on the cheap, but Bastion Capital's equities head Adrian Slack was more cautious.

"I'm not adding to 'long' positions at these levels. If anything, we're looking to take profits," he said.