LONDON: European equities eased on Tuesday, with investors taking profits after a rally to 13-month highs on concerns about the strings that Germany may attach to the eu r o zone bailout fund and the chance the US may not deliver widely awaited stimulus.
The German Constitutional Court is expected to approve the European Stability Mechanism on Wednesday. But the devil will be in the detail - any conditions to limit Berlin's flexibility on future rescues may lead to a delay in the European Central Bank's new bond-buying programme, which investors had cheered last week as a step to bring down sovereign borrowing costs and tackle the euro zone crisis.
Uncertainty also hangs over the US Federal Reserve's policy decision, due on Thursday. Markets are priced for fresh stimulus while economists give only a 60 percent chance of a third round of quantitative easing coming as soon as this week.
"There is a broad consensus that the (equities) rally has really discounted all the good news that could come in the next couple of weeks and the risks are really skewed to the downside," said Peter Garnry, equities strategist at Saxo Bank.
The FTSEurofirst 300 was down 0.3 percent at 1,100.36 points by 0728 GMT, retreating from a 13-month high of 1,113.22 set at the end of last week.
The benchmark Spanish index dropped 0.5 percent, while the Italian bourse was off 0.3 percent on concerns that any conditions imposed by the German court may discourage those countries from asking the ECB for help.
"Of course they (the court) will say yes, but they will probably say yes with a 'but', may be something like that Germans can oversee Spanish and Italian budgets. If that becomes conditionality from the Germans, it is likely that the Spanish government will delay asking for help until they are really backed into the wall," Saxo Bank's Garnry said.
"Then you (will) have this postponement in the euro zone and you could possibly see bond yields go higher, so that's a key risk ... I would say we would probably end the year a bit lower than where we are" on equity markets.
A Dutch general election on Wednesday, seen as a microcosm of the wider European debate over austerity versus stimulus as a solution, could also muddy the waters, with Liberals and Labour in dead heat.
Dutch voters are divided over the demands for massive bailouts for Europe's so-called budget sinners, particularly Greece, and for austerity measures at home that chip away at their cherished welfare benefits.
The corporate news flow also fed in to the more cautious investor mood, with luxury goods companies hurt by a profit warning from Burberry. Shares in the British company - famed for raincoats in distinctive camel, red and black check pattern - fell 18 percent. Swatch, Richemont and LVMH each shed 4.1 to 3.4 percent
Given the accumulation of event risks, strategists advised investors to take protection via the options market.
"With all the potential newsflow and with Euro STOXX 50 volatility falling back to the lows of August on relief/complacency, I think it is a good time to re-load," Nick Xanders, who heads up European equity strategy for brokerage firm BTIG, said in a note.
Implied volatility on the euro zone blue chip index has picked up from last week's one-month lows, but is still some 13 percent lower than it was before the ECB unveiled the details of its bond buying on September 6.
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