European shares hit 1-week low; seen range-bound

By Atul Prakash

LONDON (Reuters) – European shares fell sharply on Tuesday as risk appetite waned after Japan placed its nuclear crisis on a par with the Chernobyl incident while miners slipped on a Goldman Sachs report saying commodity prices may reverse.

Sentiment was also dampened after Alcoa (AA.N: Quote, Profile, Research), the largest U.S. aluminum producer, said its revenue missed estimates.

Market experts said equities were likely to trade in a range in the near term due to several headwinds.

The Euro STOXX 50 volatility index (.V2TX: Quote, Profile, Research), one of Europe’s main barometers of anxiety, rose 10 percent to hit a near two-week high. The higher the index, which is based on sell- and buy-options on the Euro STOXX 50 (.STOXX50E: Quote, Profile, Research) stocks, the lower investors’ appetite for risky assets such as equities.

“The severeness of the Japan’s nuclear incident is spooking the market. Investors are more nervous than they were at the beginning of the year. We will see some range-bound trading in the near term,” said Klaus Wiener, chief economist at Generali Investments, which manages $465 billion.

“We don’t have a clear picture. On the one hand the global upswing has so far proven fairly robust, while on the other hand there is a variety of risk like high oil prices and unresolved problems with Japan and Portugal. All lights are not green.”

At 1125 GMT, the FTSEurofirst 300 (.FTEU3: Quote, Profile, Research) index of top European shares was down 1.1 percent at 1,133.27 points after falling to 1,131.83, the lowest since April 1. The index is up just 1 percent so far this year.

Miners were the top losers, with the STOXX Europe 600 Basic Materials index (.SXPP: Quote, Profile, Research) down 3.1 percent, as metals prices fell on worries Japan’s massive earthquake and a nuclear crisis would weaken economic recovery prospects in the world’s third-largest economy and hurt raw materials demand.

Selling in key commodities and mining equities were also triggered after Goldman Sachs (GS.N: Quote, Profile, Research) warned its clients to lock in trading profits before oil and other markets reverse. Rio Tinto (RIO.L: Quote, Profile, Research) fell 2.8 percent, while Antofagasta (ANTO.L: Quote, Profile, Research) dropped 3.9 percent.

Energy shares (.SXEP: Quote, Profile, Research) fell 2.2 percent.

TECHNICAL PICTURE

Charts showed equities may face further pressure in the near term. The Euro STOXX 50 (.STOXX50E: Quote, Profile, Research), the euro zone’s blue chip index, fell below its 50-day moving average.

The index, which was down 0.8 percent at 2,951.84 points, may find some support at around 2,940, its 61.8-percent retracement of a fall from a high in February to a low in March.

Lothar Mentel, chief investment officer at Octopus Investments, which manages about $4 billion, said that toward the end of March several forward-looking indicators were still at long term highs, but not climbing any further or in some instances down from their recent highs.

“We suspect this may be an early indication that this recovery is entering its more mature mid-cycle phase. This is good news for us, as it is an environment which offers rewarding stock picking opportunities, as fortunes rotate from aggressive growth toward more value-oriented stocks,” Mentel said.

Among individual companies, Daimler (DAIGn.DE: Quote, Profile, Research) outperformed the wider market on news that the company and Bosch will establish a joint venture for electric motors. Daimler shares were flat, while volumes were 220 percent of its 90-day daily average by midday trade.

Some analysts, however, remained upbeat on equities.

“Valuations are not stretched. There’s still a lot of strength from companies, particularly from their dividend announcements,” said Philip Isherwood, European equities strategist at Evolution Securities.

(Additional reporting by Blaise Robinson in Paris and Brian Gorman in London; Editing by David Cowell)

European shares hit 1-week low; seen range-bound