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london-stock-exchange 400PARIS: European stocks dipped on Friday as soft Chinese economic data prompted investors to take a breather after a two-week rally, although a drop in the region's volatility index to a three-week low signalled rising investor appetite for risk.

The FTSEurofirst 300 index of top European shares closed 0.1 percent lower at 1,099.55 points, halting a two-week rally when it surged 8 percent, as data showed Chinese July exports rose just 1 percent from a year ago. That fuelled concerns about the pace of the world's second-biggest economy and global demand.

Despite the dip on the day in thin trade, the FTSEurofirst 300 managed to post a weekly gain of 1.8 percent - its 10th weekly gain in a row and the longest run of weekly gains for the benchmark since 2005.

"After such a rally, people are tempted to book a bit of profit, it's just healthy, investors are catching their breath," said Isabelle Enos, deputy head of asset management at B*Capital, in Paris.

"But overall, the mood has been improving and the glass is now seen as half full. People are reassured by the change in tone from the central banks and now the investment funds that have been 'underweight' equities will try to catch up," Enos said.

The euro zone's blue chip Euro STOXX 50 index fell 0.6 percent to 2,423.22 points, while the euro zone bank index shed 0.9 percent, with Commerzbank down 3.2 percent, Banco Popolare dropping 2.5 percent and BNP Paribas falling 1 percent.

The banking index, however, is still up 23 percent since European Central Bank President Mario Draghi said two weeks ago that the central bank was "ready to do whatever it takes to preserve the euro", triggering expectations of bold measures to help lower the borrowing costs of debt-stricken Spain and Italy.

MISSING THE RALLY

"You can't afford to stay on the sidelines anymore. Fund managers are now more concerned about missing the rally than they are about taking a hit," Enos said.

Around Europe, UK's FTSE 100 index ended down 0.1 percent, Germany's DAX index lost 0.3 percent, France's CAC 40 shed 0.6 percent, while Spain's IBEX dropped 0.9 percent and Italy's FTSE MIB fell 0.7 percent.

The Euro STOXX 50 volatility index, Europe's main gauge of investor anxiety known as the VSTOXX, dropped 2.5 percent to a three-week low of below 23, signalling a steady recovery in investors' appetite for risky assets.

Euro zone stocks and the volatility index - which is used to measure the cost of protecting against a decline in shares - usually move in opposite directions, but the two indexes have moved hand in hand during six of the past 10 sessions. That is an unusual breakdown in their historical correlation, with both indexes retreating on Friday.

"It's unusual, but not illogical. We're having a healthy pull-back, not a reversal of the recent rally," says David Thebault, head of quantitative sales trading, at Global Equities.  "People are booking a bit of profit, nothing wrong with that, and at the same time they aren't buying protection because the feeling is that this rally will resume soon, with a number of credible solutions to the euro zone crisis now in the pipeline."

WAITING FOR A PULL-BACK

Thebault said a limited pull-back from the current levels should help drive fund flows into European equities.

"A 3 percent drop, say around the zone of 2,350 points on the Euro STOXX 50, will trigger a lot of automatic buy orders from people who so far have missed the rally," he said.

"Keep in mind that a lot of funds out there are strongly 'underweight' European equities. But with the DAX now up 17 percent in 2012, it starts to hurt not be invested in the asset class."

Morgan Stanley European equity strategists see the rally in European stocks lasting for a "while longer", they said in a research note on Friday, adding that their preferred sector on valuation grounds at the moment was European insurance. "Valuation is reasonable - our market-timing indicator remains in 'buy' territory - and investor sentiment and positioning are not that stretched," the strategists wrote.

Copyright Reuters, 2012

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