London: European shares fell for a third straight session to hit a two-week low on Wednesday on renewed concerns about the health of the financial sector and on worries the stock market rally has gone too far too fast.
Banking stocks were the worst hit after a sharp sell-off in the US on Tuesday and in Japan on Wednesday, with KBC Groep down 5.1%, Swedbank falling 5.5% and Natixis down 4.2%.
Investors cut their trading positions in the sector as concerns about the US financial sector were reignited. Sanford C. Bernstein Research cut American International Group to “underperform” from “market perform,” and said there was no reason to continue owning the stock.
At 1047 GMT, the FTSEurofirst 300 index of top European shares was down 0.7% at 947.20 points. The benchmark index, which shed 1.8% on Tuesday, is still up 46% since hitting a record low in March.
The technical outlook also appeared grim in the near term.
“We have tested the highs from October and November of last year and it looks like we are in for a correction. It could be little deeper than the corrections over the summer,” said Phil Roberts, technical analyst at Barclays Capital.
“The risks are that the market corrects at least down to the 915 area, however, we are looking for a base around 900 in the longer term,” he said, referring to the FTSEurofirst 300.
Insurers also lost ground, with Aegon falling 4.6%, Swiss Re down 4.7% and ING dropping 3.9%.
The DJ STOXX insurance index was down 2% and the DJ STOXX banking index fell 1.7%. Banks are up 51% on the year, helped by stimulus packages by central banks and governments across the globe.
European Union finance ministers were likely to tell the G-20 on Wednesday that plans to withdraw fiscal help to economies should be prepared, but that it is too early to implement them, EU sources said.
Mining shares fell in line with the broader market and as copper fell to a near two-week low on worries prices in industrial metals have overheated.
BHP Billiton, Anglo American, Antofagasta, Rio Tinto, Xstrata and Eurasian Natural Resources fell 1.1-3.7%.
A second analyst also viewed the market outlook with caution.
“The rebound from March has been remarkable. Year-to-date gains for most of the indexes are strong, although we are still below pre-Lehman Brothers levels,” said Valerie Plagnol, chief strategist at CM-CIC Securities in Paris.
“But the glass is still half empty. Macro data has improved, but we’re in a pattern of destocking-restocking, and the outlook for consumer spending is still grim.”
Data showed the euro zone economy contracted only marginally in the second quarter, dragged down by a plunge in inventories and private investment.
The VDAX-NEW volatility index, a measure of investor risk appetite, was up 2.7%, after a 5.5% rise on Tuesday, when the US CBOE Volatility Index jumped 12%, hitting its highest level since early July.
The higher the volatility index, the more risk averse equity investors are.
“It shows how fragile sentiment can still be as the market was awash with rumours about various US institutions,” said Arifa Sheikh-Usmani, equity trader at Spreadex in London.
A.P. Moller-Maersk fell 8.7% after the Danish shipping and oil group said it aims to tap investors for close to $1.8 billion through a share placement to boost its financial flexibility.
Alcatel-Lucent fell 7.5% after the company said it was raising the initial amount of its convertible bond issue to €870 million.