Financials drag down European shares to 2-week low
* FTSEurofirst 300 down 0.8 percent
* Banks among top losers on disappointing results
* BoE, ECB keep interest rates unchanged
* For up-to-the-minute market news, click on [STXNEWS/EU]
(Updates after ECB decision) By Atul Prakash
LONDON, May 5 (Reuters) - European shares hit a two-week low on Thursday as banks fell on disappointing earnings news, with Lloyds (LLOY.L) slipping on a surprise $5.3 billion provision and Societe Generale (SOGN.PA) missing profit forecasts.
A 5.6-percent rise in the Euro STOXX 50 volatility index .V2TX, one of Europe's main barometers of anxiety, suggested a decline in investors' appetite for riskier assets, while charts signalled further declines in the near term, though analysts remained positive on the stock market's longer-term outlook.
At 1152 GMT the FTSEurofirst 300 .FTEU3 index of top European shares was down 0.8 percent at 1,125.40 points after touching 1,122.31 -- the lowest since April 20. It hovered below its 50-day moving average -- a near-term bearish signal.
Banks featured among the top losers, with the sector index .SX7P down 1.2 percent. Lloyds fell 8 percent after taking a huge charge to compensate consumers for mis-selling loan repayment insurance policies, while Societe Generale fell 4.9 percent after posting lower than expected first-quarter results.
"The backdrop for banks is more challenging than it was some years ago due to regulatory changes. The earnings trajectory that we expect is not as positive as it used to be and there is some threat of seeing further recapitalisation efforts," said Klaus Wiener, chief economist at Generali Investments.
"Sector wise, banks should be underweighted," said Wiener, whose company manages 330 billion euros ($490.6 billion).
Media shares also fell, with Lagardere (LAGA.PA) down 1.7 percent after Kepler cut its price forecast for the stocks, while France's M6 (MMTP.PA) dropped 1.1 percent as results showed on Wednesday that its sales fell 5.1 percent.
The Bank of England kept key interest rate unchanged at 0.5 percent, as expected, after a run of subdued data which has cast doubt on the strength of the economic recovery. [ID:nLAC005840]
The European Central Bank also held rates at 1.25 percent, despite rising inflation fears. ECB President Jean-Claude Trichet will address a news conference starting at 1230 GMT, with investors looking for signals on whether it will raise rates in June. [ID:nLDE7440GG]
"While we do not rule out a hike in June, we favour July," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.
"The risk associated with a June hike is that by delivering the first two increases in such close proximity markets might overreact, fearing that an aggressive tightening cycle is underway. With wage growth still contained and money and credit growth low, there is no need to rush."
Nick Tranter, head of derivatives at Espirito Santo, said the ratio of put/call open interest on Euro STOXX 50 .STOXX50E eased to 1.27 from 1.33, a level last seen in 2007, indicating investors were trimming risk.
"There is less confidence in hedge funds in particular ... They are carrying less risk on the long side."
Zurich Financial Services (ZURN.VX) fell 4.2 percent after posting a 32 percent drop in first-quarter profit, while Adidas (ADSGn.DE), the world's second-largest sporting goods firm, rose 3.5 percent after raising its sales outlook. [ID:nLDE744057]
Analysts were positive on the long-term outlook.
"We are still fairly constructive on equities. Valuations are not as challenging as they were two to three months ago, but there is still nothing which would stand in the way of seeing equities rising," Wiener said.
According to Thomson Reuters Datastream, the STOXX Europe 600 .STOXX carries a one-year forward price-to-earnings of 10.9, against a 10-year average of 13.5. (Editing by David Cowell)
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