European shares hit for second day by Cyprus concerns

Tue Mar 19, 2013 1:28pm EDT

* FTSEurofirst 300 down 0.4 percent

* Implied volatility posts biggest 2-day rise in 1-1/2 yrs

* Analysts see some opportunities in banks' broad retreat

By Toni Vorobyova

LONDON, March 19 (Reuters) - European shares fell for a second day on Tuesday, with investors spooked by the possibility that Cyprus could reject a bailout, likely leading to bank collapses and fallout for the euro zone.

Cyprus' parliament was widely expected to reject the 10 billion euro ($13 billion) rescue package - which, in a break with previous EU practice, includes a levy on bank accounts - at a vote on Tuesday. Without the money, the island could face a sovereign default and even a euro zone exit, analysts say.

With the Cyprus stock exchange closed, Greece was the worst hit of the regional bourses, shedding 3.9 percent.

The pan-European FTSEurofirst 300 closed down 0.4 percent at 1,194.91 points after a volatile session.

The EuroSTOXX 50 index of euro zone blue chips - which tends to be more sensitive to swings in sentiment on the region - fell 1.1 percent.

The VSTOXX implied volatility index - a crude barometer of investor risk aversion - jumped, taking its gains so far this week to 37 percent and marking its biggest two-day rise in 1-1/2 years, as investors sought protection against or bet on further market falls.

"VSTOXX had a significant jump so you can see that people are aware of the risk, especially in the near term," said Ioan Smith, strategist at Knight Capital.

"Personally I think it is pretty serious ... It's very myopic to look at the size of Cyprus, this is more of a procedural or operational impact across the board."

Banks were the worst performing sector, with the STOXX index of euro zone banks dropping 4 percent to hit three-month intra-day lows on concerns that the Cyprus situation could prompt investors to take money out of Italy and Spain, too.

Some analysts argued that the broad selloff could create potential buying opportunities in banks less exposed to Southern Europe, or even relative winners within that region.

"BBVA, and Santander which has a very similar profile, is a potential beneficiary of deposit flight from smaller Spanish institutions, given its relative balance sheet strength and the difficulty that retail depositors may find moving money overseas," Simon Maughan, head of research at Olivetree, said in a note.

"However, BBVA's share price is correlated with its CDS level and any rise in the cost of credit is likely to coincide with share price weakness before an attractive entry level is reached."

Longer-term investors, though, remained largely on the sidelines, noting the still supportive backdrop for European equities from central bank stimulus, high dividend yields and still relatively attractive valuations, which had helped FTSEurofirst 300 scale 4-1/2 year highs last week.

"The volatility in Europe will be higher, but the trend is not broken because Europe's valuation is much cheaper than the rest of the world," Joerg de Vries-Hippen, CIO European Equities at Allianz Global Investors, which has 304 billion euros of assets under management.

"I would say Europe will come next year out of the weakness in economic growth and normally the markets react six months or even nine months in advance of that."