European equities drifted lower on Friday as worries about the euro zone debt crisis resurfaced after Moody's cut Ireland's rating, while a jump in inflation raised concerns of more monetary tightening in China.
At 0909 GMT, the FTSEurofirst 300 .FTEU3 index of top European shares was 0.1 percent lower at 1,128.26 points after hitting a two-week low in the previous session.
Banks featured among the top decliners, with the sector index down 0.8 percent, Bankinter (BKT.MC: Quote, Profile, Research, Stock Buzz) falling 1.8 percent and Bank of Ireland (BKIR.I: Quote, Profile, Research, Stock Buzz) down 0.7 percent. Miners also lost ground on concerns further monetary tightening in China could hurt demand for raw materials.
"The fact that Moody's downgraded Ireland is certainly not helpful for sentiment. It once again shows that the troubles facing the euro zone are not completely behind us and may resurface at any given point," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.
"Sell in May and go away may not be such a bad idea. Over the next couple of months we will be probably looking at a weaker and more nervous market."
Moody's cut Ireland's sovereign rating by two notches and kept its outlook on negative, a day after fellow ratings agency Fitch upgraded its outlook for the country. In Greece, the government will present fresh austerity plans to convince markets it can avoid restructuring its debt. [ID:nWLA8186]
"These downgrades can periodically spook the market. These countries -- Greece, Ireland and Portugal -- are in a special situation and what is key now is that they prove to the market that they have the will to consolidate successfully," said Klaus Wiener, chief economist at Generali Investments, which manages $465 billion.
"There is a tug of war between macro fundamentals, which are still fairly positive, and risk factors like oil prices, the situation in Japan and a turn in monetary and fiscal policies. As long as macro fundamentals stay solid, we have a volatile market with a positive drift."
Across Europe, France's CAC 40 .FCHI fell 0.2 percent, Spain's IBEX .IBEX dropped 0.4 percent and Portugal's PSI 20 fell 0.2 percent. Ireland's ISEQ .ISEQ was up 0.5 percent after recent losses, helped by a jump in media shares.
Analysts said the earnings season's start was good, but not great. Alcoa (AA.N: Quote, Profile, Research, Stock Buzz) disappointed the market, while Google (GOOG.O: Quote, Profile, Research, Stock Buzz) beat on revenues, but missed slightly on earnings due to higher costs. JPMorgan (JPM.N: Quote, Profile, Research, Stock Buzz) beat handsomely on earnings, but the stock has been down since it reported results.
"When the market is talking, we should all pay attention and listen. When stocks no longer go up on good news, the good news has already been discounted and the market looks tired," Gijsels said.
But Goldman Sachs maintained its "overweight" stance in equities on both a 3-month and a 12-month horizon, on hopes of strong economic growth combined with low interest rates, high earnings growth, and attractive valuations.
"This makes equities look attractive compared with other asset classes. Yet, in the near term, we believe the risks are higher than in January."
Chemicals shares topped the gainers' list, with the sector index up 0.8 percent. The world's top agrochemicals company Syngenta (SYNN.VX: Quote, Profile, Research, Stock Buzz) rose 1.7 percent after executives at the group said it is eyeing more growth as spiralling commodity prices bolster demand for its products.
Nestle (NESN.VX: Quote, Profile, Research, Stock Buzz), the world's largest food group, rose 0.9 percent and volumes were 210 percent of its 90-day daily average in the first two hours of trading as the company said strong emerging market growth and price rises helped to drive better than expected first-quarter underlying sales growth. (Editing by Mike Nesbit)