European Markets Slammed as Tapering Looms Large

European shares hit a two-week low and a major volatility index spiked higher, as expectations hardened that the U.S. Federal Reserve will start to scale back monetary stimulus measures next month.

The pan-European FTSEurofirst 300 index fell 1.1 percent to 1,211.21 points in mid-session trade, marking the index's lowest point since early August.

The euro zone's blue-chip Euro STOXX 50 index, which hit a two-year high of 2,855.89 points last week, fell 1.5 percent to 2,781.25 points, its lowest point in around two weeks.

The Euro STOXX 50 Volatility Index surged 10.5 percent to 19.32 points, highlighting investor uncertainty over the near-term outlook for financial markets.

The FTSEurofirst 300 reached a five-year high of 1,258.09 points in late May but has since slipped back on growing speculation that the Fed will soon start to scale back its monthly bond buying programme, which has driven much of the global equity rally this year by hitting returns on bonds.

Minutes from the Fed's July meeting, due out on Wednesday, could indicate whether the U.S. central bank is preparing to start withdrawing stimulus.

The prospect of reduced Fed stimulus has also led to parallel gains in core sovereign debt yields that have also made stocks less attractive to investors.

However, Swiss bank Reyl's chief investment officer Francois Savary categorised the current pullback as a "consolidation" as investors book profits on this year's rally, rather than a more serious stock market collapse.

"The short term is shaky, but we should still finish the year higher," he said.

"I see this as a consolidation."

He expected the Euro STOXX 50 index to end 2013 up at 2,900 points.

CASH IN YOUR CHIPS

Savary said he remained optimistic on the longer-term outlook for European equities due to signs that the region's economy is recovering from the euro zone's sovereign debt crisis.

He was considering adding to his European equity exposure, but felt now was not the right time as the market retreat was "not advanced enough."

Phoebus Theologites, chief investment officer at investment firm SteppenWolf Capital LLC, also said now was a good time to sell shares for a profit, with the FTSEurofirst 300 still up 7 percent since the start of 2013.

"I would err on the side of locking in profits at current levels," said Theologites, adding that he would look to buy back into the Euro STOXX 50 if it fell to 2,500 points.

"Every day that you get a 'red' day in the States, it follows on through to Asia and Europe. I do not expect a crash, but I expect a dip of a few percentage points."