European Markets Slide Amid Euro Debt Fears

European shares dropped to a three-week low in morning trade on Monday on nervousness ahead of quarterly earnings results and lingering worries about indebted euro zone countries.

Analysts and fund managers said they expected a long period of rangebound trade, but that equities would gather momentum in the second half of the year on an improving global economic outlook and support from merger and acquisition activities.

At 0858 GMT, the FTSEurofirst 300 index of top European shares was down 0.8 percent at 1,122.94 points after hitting 1,122.87 points, the lowest since late March. The appetite for riskier assets fell, with the Euro STOXX 50 volatility index surging 9 percent.

Financials were the worst hit, with the European banking index falling 1.6 percent and the Thomson Reuters Peripheral Banking index down 3 percent, on a newspaper report that Greece had asked to restructure its debt, though the country's finance ministry later denied the report.

Alpha Bank declined 3.1 percent, while BBVA fell 2.7 percent. Investors waited for results from Citigroup, which is expected to report a drop in quarterly profit and revenue on an uncertain trading environment and weak consumer loan demand. [ID:nN17260604]

"Company results haven't been that great, and there are concerns that margins for a lot of companies are not going to rise. The bias for the market is more on the downside," said Koen De Leus, strategist at KBC Securities in Brussels.

"The debt crisis is far from over. The big worry is Greece, and there is some realisation that the country could default."

Investors were also concerned that big electoral gains by Finland's anti-euro True Finns Party could disrupt a bailout plan for Portugal. [ID:nLDE73G02L]

These concerns pushed the euro to a 10-day low against the dollar, while the cost of insuring Greek debt against default rose on Monday. "Not least among the euro area periphery challenges is Greece. Despite its loan programme, the market remains highly skeptical of the country's solvency," Deutsche Bank said.

Across Europe, Britain's FTSE 100 fell 0.7 percent, Spain's IBEX was down 1.2 percent, while Portugal's PSI 20 dropped 1 percent. The Thomson Reuters Peripheral Eurozone Countries Index fell 2.1 percent.


Market watchers said the equities market was looking tired.

"We may have a pause as we go into the summer, but we will probably have a late surge, mainly because the U.S. economy is still growing quite well," said a London-based fund manager, whose company manages about $80 billion.

"There is no return on cash, and you are not going to buy government bonds. People will probably buy risk assets, which is equities. And you have got a bit of M&A, which is going to underpin the market. Over the end of the year, I suspect that it will be higher than where it is just now."

He said the sellers were mainly hedge funds, which were increasing their short positions on the market.

J.P.Morgan Cazenove saw headwinds such as strong crude oil prices and said it expected mixed company results and guidance in the first quarter, but forecast new highs in the second half of the year and advised investors to buy stocks on price dips. The STOXX Europe 600 Food & Beverage index fell 1.3 percent, led lower by Nestle, down 3.6 percent, which agreed to take a 60 percent stake in China's Yinlu Foods Group.

Synthes rose 6.5 percent as it confirmed it was in talks with Johnson & Johnson after reports the group was looking to buy the company for about $20 billion. (Editing by Will Waterman)