European shares fall to three-week low

European shares posted their biggest fall in three weeks on Monday as investors worried the measures outlined at last week's EU summit to strengthen budget discipline would be of only limited value in resolving the eurozone debt crisis. "The measures were quite positive, but the market was looking for a magic bullet, and that hasn't happened," said Erik Esselink, fund manager at Invesco Perpetual, which has 5 billion euros under management.
The FTSEurofirst 300 index of top European shares fell 1.9 percent to close at 967.49 points, with trading volumes at just 76.2 percent of the index's 90-day average. Banks and insurers were the biggest casualties, having had a strong run-up in the last two weeks on optimism the summit would offer a solution. The STOXX Europe 600 Banking Index fell 3.9 percent, and has fallen 33.8 percent in 2011, making it the worst-performing sector, with several banks having suffered writedowns on eurozone peripheral debt.
This compares with a drop of 13.8 percent for the pan-European index. The STOXX Europe 600 Insurance Index fell 4.6 percent. The euro fell sharply and borrowing costs rose in European peripheral markets, a major focus for equity markets in recent weeks.
Italian 5-year bond yields shot up above 7 percent, widely seen as a danger level while 10-year yields spiked above 6.8 percent and Spanish 10-year yields topped 6 percent. Italy's FTSE MIB was the worst country performer, down 3.8 percent. The two biggest Italian banks, Intesa SanPaolo and UniCredit both fell 5.8 percent. In a further sign the eurozone debt crisis was already taking its toll on growth, the Organisation for Economic Cooperation and Development said on Monday all major economies are losing momentum with economic activity across OECD countries at its weakest in two years. "Stocks are reasonably cheap, very cheap." Esselink said. "We are somewhere near the bottom, but maybe we need to go down another 5 percent. If we have political and monetary stability within the next few months, it's set up for a very nice market."
Equity valuations on Thomson Reuters Datastream showed the STOXX Europe 600 carrying a one-year forward price-to-earnings of 9.2, compared with 11.2 for the S&P 500. Many fund managers were in broad agreement about the limitations of the summit. "(The summit measures) are all very good but they didn't do anything about addressing the lack of growth in these economies or their pile of debt, which is only going to take time," said Andrea Williams, manager of Royal London Asset Management's European Income fund.
Williams, whose fund has around 359 million pounds under management across continental equities, kept her cautious stance after the EU announcement, with an "underweight" stance on banks and an "overweight" on defensives.