* FTSEurofirst 300 down 2.4 pct, Euro STOXX 50 down 2.6 pct
* Euro STOXX 50 breaks below 50-day moving average
* Italian, Spanish bans on short selling limit losses
* Markit data shows low short selling interest in banks
* Stock valuation ratios not useful -Saxo Bank's Garnry
By Blaise Robinson
PARIS, July 23 European stocks sank on Monday,
with a key blue-chip index tumbling to a three-week low and
piercing through a major support level, hurt by mounting fears
that Spain could soon become the fourth euro zone member to
request a full bailout.
A ban on short selling unveiled by the Italian and Spanish
market authorities helped limit the damage on local stocks, but
it was not enough to reverse the overall negative trend across
European markets, where trading volumes were brisk.
The FTSEurofirst 300 index of top European shares
closed 2.4 percent lower at 1,024.27 points, while the euro
zone's blue-chip Euro STOXX 50 index dropped 2.6
percent to 2,179.31 points, breaking below its 50-day moving
average, a key support level.
"We're moving closer to the cliff, the systemic risk is just
going up but it seems that it will take a major event such as a
bank failure or the Greeks saying they want to leave the euro
zone, before we get real decisions by the EU leaders," Saxo Bank
head of equity strategy Peter Garnry said.
"As long as there's no 'meeting of the EU cardinals' and no
bold decisions on the future of the bloc, things will just
Europe's STOXX bank index tumbled 2.7 percent, with
Commerzbank falling 6.1 percent and BNP Paribas
dropping 5.5 percent.
Spain's central bank said on Monday the economy sank deeper
into recession in the second quarter, fuelling fears the
country's funding crisis could quickly accelerate and force it
to request a full bailout.
BAN ON SHORT SELLING
During market hours on Monday, Spanish and Italian market
regulators reintroduced bans on short selling in a bid to
discourage speculative trading following a two-session sell-off
The move helped the two countries' main stock indexes trim
their losses, with Madrid's IBEX ending down 1.1 percent
after losing as much as 5.5 percent and Milan FTSE MIB
ending down 2.8 percent after losing as much as 5.2 percent.
After the closing bell, France's AMF stock market watchdog
said it would not follow the move to reinstate the short selling
ban, saying it was not justified at this stage.
"The last few times we've had short-selling bans, we've seen
the market go down," said Toby Campbell-Gray, head of trading
and risk at Tavira Securities.
"It takes liquidity out of the system, and it just shows
that the powers that be don't understand how markets work," he
Data from Markit, a provider of financial information
services, shows that short sellers have not been targeting
Spanish or Italian banking stocks.
Only 3.1 percent of the outstanding shares of Banco
Santander are out on loan, while the average on the
IBEX is 4 percent, data shows. Italy's UniCredit has
1.1 percent of its shares out on loan, compared with an average
of 2.7 percent for the FTSE MIB.
The Euro STOXX 50 is down 17 percent since a high hit in
mid-March, dragging its 12-month forward price-to-earnings ratio
to 8.8, well below a 10-year average of 11.3.
But despite the relatively cheap valuation levels, Saxo
Bank's Garnry warned ratios in the current market environment
are not as useful for investors as they used to be.
"Earnings have been pretty resilient, but that's not what's
driving the market. Asset prices are essentially following the
perceived tail risks. Spanish and Italian stocks look very
cheap, but when you buy them, you're also buying a currency
risk: what if the euro zone breaks down?" he said.
"It makes no sense to use valuation levels to make
investment decisions at this point. You can't just bet on mean
reversals, there's too much uncertainty about the outcome of
(Reporting by Blaise Robinson; additional reporting by Sudip
Kar-Gupta in London; editing by Ron Askew.)