London: European shares sank to a four and a half month closing low on Monday in a broad-based sell-off as political deadlock in Greece raised the prospect of the country’s exit from the euro zone, while concerns over China’s economy also undermined sentiment.
The FTSEurofirst 300 index of top European shares provisionally ended down 1.7% to 1,005.33, its lowest close since 30 December. The Euro STOXX 50 volatility index, Europe’s main gauge of investor anxiety, meanwhile, jumped almost 12%.
“With no real positives to be drawn from the global economic picture whilst the euro zone crisis grows deeper by the day, investors are voting with their feet,” Mike McCudden, head of derivatives at Interactive Investor, said.
“Some shares are indeed starting to look very cheap but investors continue to take a risk-off approach until the storm has passed.”
Euro zone banks fell 3% by 0755 GMT after Greek political leaders failed in their latest efforts to form a ruling coalition, raising the spectre the country may exit the euro zone and sending the common currency to a four-month low.
Adding to the negative tone, German Chancellor Angela Merkel’s conservatives suffered a crushing defeat on Sunday in an election in Germany’s most populous state, a result that could embolden the leftist opposition to step up attacks on her European austerity policies.
“It’s a real headache because the political framework is going against any kind of risky assets,” Franz Wenzel, chief strategist at AXA Investment Managers in Paris, said.
“We are in for a month or two of fairly bumpy markets at least. The most cyclical stocks will suffer most and, of course financials.”
Wenzel expected investors to position themselves “very, very defensively”, taking money out equities and into cash or German Bunds.
His views were echoed by UBS, which cut its equity allocation to “neutral” from “overweight”, flagging that Greece heading for a “hard landing” on its debt and Spain was struggling to finance the required recapitalisation of its financial sector.
Banco Santander and Bankia were down 3.4% and 4.4%, respectively, as they announced they would set aside an extra 2.7 billion euros and 2.1 billion euros to meet new government requirements aimed at cleaning up the country’s sickly property market.
“Higher provisions will generate significant losses for banks in 2012-2013, as we see dividends at risk and further adjustments once independent appraisals from foreign advisors are finalized,” JPMorgan said in a note.
“While we welcome the Government moving ahead in loss recognition, these measures are simply not enough, in our view, as we consider that external aid to clean up the banking system remains the best and cheapest option for Europe long term.”
Spain’s Ibex 35 index was the worst performer among major European indexes, falling 2.5%.
The FTSEurofirst 300 index was down 1.4% at 1,007.95 and the Euro STOXX50 was down 2% at 2,210.23.
Basic resources stocks, down 1.8%, also weighed amid worries about slowing growth in top commodities consumer China, which failed to appease markets with a cut to banks’ cash reserve requirements on Saturday.
Analysts said monetary policy easing steps taken since the final quarter of last year might be insufficient to deal with the downturn and China may need a back-up plan to stop economic growth being cut short by a surprise dip in demand at home and abroad.
“This move was well expected, given the very disappointing April activity data released last Friday,” Societe Generale said in a note. “We think any easing measures will still be implemented in a much more cautious manner than in 2008/9. Things may continue getting worse before they get better slowly.”
Holcim, the world’s second largest cement maker, was a rare gainer after saying it was launching a targeted programme aimed at increasing operating profit by at least 1.5 billion Swiss francs ($1.62 billion) by the end of 2014, sending the shares up 1.7% to top the FTSEurofirst 300 index.