* EuroSTOXX 50 down 1.3 pct, hits two-month lows
* Implied volatility jumps on euro zone tensions
* Correction expected after rally, but seen modest
By Toni Vorobyova
LONDON, Feb 6 Euro zone equities sank to
two-month lows on Wednesday, with investors locking in profits
on a half-year rally, spooked by a run of weak corporate
earnings and signs of growing political tensions in the euro
France and Germany showed signs of disagreement over the
euro exchange rate, whose recent strength threatens corporate
profits and a nascent economic recovery in the region.
France said it would raise concerns about the euro at a
finance ministers' meeting next Monday, but expectations of any
action cooled after the spokesman for German Chancellor Angela
Merkel said the currency is not overvalued.
The apparent disagreement further fuelled concerns about
stability in the euro zone, adding to uncertainty over the
outcome of upcoming Italian elections and a corruption scandal
in Spain and prompting some investors to bank gains on a 25
percent rally in euro zone blue chips since June.
"It's probably quite a good time to take profits," said
Robert Quinn, chief European equity strategist at S&P Capital
IQ. "We're looking at a period of consolidation in the short
term and most of the visible risks seem to be at the beginning
of the year."
The EuroSTOXX 50 gauge of euro zone blue chips fell 1.3
percent to 2,617.35 points, its weakest finish since
early December and further retreating from 1-1/2 year peaks of
2,754.80 points set last week.
The pan-European FTSEurofirst slipped 0.2 percent to
1,152.12 points, its losses tempered by a solid
performance from UK blue chips.
Confidence in the euro zone could face further tests on
Thursday, when Spain is looking to issue up to 4.5 billion euros
of bonds and the European Central Bank is likely to face tough
questions about the currency after its monthly meeting on rates.
Implied volatility on the EuroSTOXX 50, seen as a crude
barometer of investor risk aversion, jumped 5 percent.
The stock rally's top performers turned in to the biggest
losers, with euro zone banks, which had surged nearly 13 percent
in January, off 1.6 percent on Wednesday. The sector
also tends to be the most sensitive to turns in the euro zone
sentiment due to their sovereign bond holdings.
"There is a financial sell programme in the market this
afternoon and the EU ex UK banks index broke the 50 day moving
average, which triggered stop-loss selling," said a trader.
Corporate reports added to the cautious mood, French builder
Vinci warning of a flat 2013 for its construction and
concessions businesses, while both Swedish lender
Handelsbanken's and farm chemicals maker Syngenta
undershot expectations on operating profit.
So far, half of euro zone's large and mid-cap companies have
missed full year earnings forecasts, prompting analysts to cut
their 2013 expectations by 1.9 percent over the past month,
according to Thomson Reuters StarMine. The UK looks relatively
healthy in comparison, with only 32 percent of misses.
"The risk for earnings downgrades in the European equity
space is relatively higher, given both ... the slightly elevated
level of the consensus estimate - and also the short to
medium-term effect that we think this (strong) euro effect is
going to have over the next few quarters through translation
losses, FX losses and export competitiveness losses," said
Ashish Misra, head of investments at Lloyds TSB Private Banking.
However, in the longer term, he still sees strong prospects
for stocks, staying "modestly overweight" on both UK and Europe.
"This correction which is now starting, hasn't really taken
anyone by surprise. European equities are up 25-30 percent since
last summer so it's not bad thing that they are pausing for
breath," Misra said. "We see this as a reasonably shallow 5-7
percent, definitely single, digit correction."