European Shares Pummeled Amid Syria Worries

European stocks dropped on Tuesday as unease about the threat of a U.S.-led military strike against Syria prompted some investors to cash in on recent strong gains.

Banking stocks, which had strongly outperformed the market lately, led the broad-based retreat with Deutsche Bank down 2.6 percent and UBS down 1.9 percent.

At 1033 GMT, the FTSEurofirst 300 index of top European shares was down 1.2 percent at 1,209.08 points after falling to as low as 1,206.82, a level not seen since late July.

The United States signalled on Monday possible military action against Syria over a chemical weapons attack in its civil war last week. Washington said it believed Syrian President Bashar al-Assad was responsible for the gassing of hundreds of people in a rebel-held suburb of Damascus.

The rising tensions hit stocks worldwide, with Dubai's index down 7 percent, its largest one-day slump since 2009.

"The full scope of this crisis is difficult to predict at this point, so it becomes an excuse for investors to cash in some of the recent gains," said David Thebault, head of quantitative sales trading, at Global Equities.

"Stocks are fairly valued now, and analyst forecasts are still being cut, so the upside looks limited at least until we get real improvement in corporate profits."

The market rally since late June has propelled European shares to valuation ratios not seen since early 2010.

The broad STOXX Europe 600 trades at 12.9 times expected earnings, above a 10-year average price-to-earnings ratio of 12.1, according to Thomson Reuters Datastream.

NEGATIVE EARNINGS MOMENTUM

Europe's earnings momentum - analyst upgrades minus downgrades as a percentage of the total - remains negative, however, at -3 percent. That is an indication that despite a recent batch of better-than-expected company results, analysts continue to downgrade their profit forecasts.

The euro zone's blue-chip Euro STOXX 50 index was down 1.6 percent on Tuesday, to 2,776.76 points.

Charts showed a technical bearish pattern shaping up on the index, called a "head and shoulders", and crossing below 2,767 points - the "neck line" of the pattern - could trigger further losses, with a downward target of 2,645, chartists warned.

"The market has gone up a bit fast lately, and a lot of fund managers have already reached their targets for the year, so it's tempting to book profits now that geopolitical risks are rising," said Philippe de Vandiere, analyst at Altedia Investment Consulting, in Paris.

De Vandiere said investors were switching from stocks exposed to emerging markets into more domestically-focused ones.

Cyclical shares, among the most exposed to emerging markets, were among the top losers on Tuesday. Copper group Antofagasta , which posted a sharp drop in profits, was down 2.6 percent, while miner Rio Tinto was down 2.1 percent and cement maker Lafarge down 2.6 percent.

Also raising a red flag, data from 2iQ Research shows that European corporate insiders - usually seen as contrarian investors - have nearly stopped buying shares in their own companies this month.

According to the research firm which monitors directors' dealings, the buy/sell ratio has tumbled 0.187, the lowest ratio since 2iQ started to screen the data in 2005.