European shares at three-month low

European shares fell to a three-month closing low on Monday on growing unease about the eurozone debt crisis, after a delay in the release of aid to Greece and a possible downgrade of Italy's credit rating. Banks were under pressure, with the STOXX Europe 600 banking index down 0.9 percent, as eurozone finance ministers turned up the heat on Greece, calling for it to impose tougher austerity measures before a final decision is made on a further 12 billion euros in loans.
Adding to uncertainty, the International Monetary Fund said it will have to be sure Greek reforms are on track and will be financed by the eurozone, before paying out its part of the next aid tranche for Athens. "There seems to be a stand-off between eurozone finance ministers and Greece, and that is causing uncertainty about the next tranche of funds and encouraging risk aversion," said Joshua Raymond, market strategist at City Index.
"Quite clearly finance ministers are trying to get Greece to start making tough and crucial decisions, regardless of the protests that are happening on the streets of Athens." Investors were also cautious ahead of Tuesday's confidence vote called for by Greece Prime Minister George Papandreou in a bid to push through reforms.
Italy's banks were heavy fallers in the sector after Moody's threatened to cut the country's sovereign debt rating, saying structural weaknesses such as a rigid labour market pose a challenge to growth, and that higher rates may derail its economic recovery. The pan-European FTSEurofirst 300 index of top shares ended down 0.5 percent at 1,081.19 points, its lowest close since mid-March.
The index is down 3.6 percent this year, partly on concern over the escalating debt problems in the eurozone periphery and worries about a slowdown in the pace of global economic growth. Highlighting a rise in risk aversion, the Euro STOXX 50 volatility index , one of Europe's main gauges of investor anxiety, rose to its highest level in three months in intraday trade, before paring gains.
The eurozone's blue chip Euro STOXX 50 index fell 0.8 percent, with the index's 50-day moving average breaking below the 200-day moving average in a strong bearish technical signal called a dead cross. A dead cross occurred last week on Spain's IBEX 35, and is about to happen on Italy's FTSE MIB benchmark. Some strategists, however, have cited valuations as a reason for a rebound in equities.
Equity valuations on Thomson Reuters Datastream showed the STOXX Europe 600 carrying a one-year forward price-to-earnings ratio of about 10.2, against 12 for the S&P 500. Adrian Fitzpatrick, European Head of Trading at Aegon Asset Management, said strong company balance sheets and positive corporate data in the second-quarter reporting season would help lift shares by the year-end, adding the figures might show if "the pain in the economy was transferring to corporates". Among gainers was index heavyweight Vodafone, which rose 1.7 percent after the Financial Times's Lex column highlighted a thawing of relations between the British telecoms operator and US partner Verizon.