Unease over central bank tightening hits European stocks
* FTSEurofirst 300 down 1.5 percent * Zurich Insurance results a weak spot in strong sector * Technical charts show scope for more near-term weakness By Toni Vorobyova LONDON, Aug 15 (Reuters) - European stock markets shed some of their recent strong gains on Thursday, unnerved by signs that central banks might tighten policy sooner than expected, which led investors to position for more weakness. British stocks led the fallers, with the FTSE 100 down 1.9 percent after strong retail sales added to speculation that a rebounding UK economy could trigger an earlier-than-planned interest rate rise. Signs of easing U.S. unemployment kept alive the possibility that the Federal Reserve could scale back bond purchases as soon as next month. The prospects of less central bank stimulus, coupled with the looming expiry of a sizeable chunk of defensive positions on European shares on Friday, shook investor sentiment. The FTSEurofirst 300 fell 1.5 percent to 1,221.59 points by 1413 GMT. The EuroSTOXX 50 benchmark of euro zone blue-chips lost 1.4 percent to 2,811.48 points, retreating from 2-year peaks. The steep market slump pushed up realised 25-day volatility on the index to 11.46 from a trough of 10.75. "The four or five times we've been at similar levels, it's created market sell-offs ... You are at historically divergent levels between bonds and equities (volatility) so bonds are telling you something and equities, up until now, didn't seem to be listening," said Andy Ash, head of sales at Monument Securities. "We've certainly be advocating people buy some September puts because they look very cheap and it looks a fantastic way to be short of the market with limited downside." Indeed put options, which give the right to buy the index later and are thus used to bet on or protect against future market weakness, witnessed strong activity. The 2,600 strikes on EuroSTOXX 50 saw the most demand for September and October, implying a fall of some 8 percent. Demand was exacerbated by the expiry of August options on Friday, when some 75 percent more puts are due to mature than upside calls. "If there are a lot more puts expiring relative to calls than normal one is susceptible after the expiry because those puts are where your hedges are," Monument's Ash said. Technical charts also showed scope for more weakness. "Given the inability of bulls to build on yesterday's break above the 2,851.48 key high and bearish divergence present on the daily momentum study, I'm slightly cautious at the moment," said Chris Wright, technical analyst at Informa Global Markets. "...However, the broader uptrend remains very much intact." The steepness of Thursday's retreat was exacerbated by very thin volumes, even by August standards, given the Assumption Day bank holiday in much of continental Europe. But volumes were robust at about 150 percent of the daily average in Zurich Insurance, which fell 3.7 percent after a sharp drop in second-quarter profits prompted it to voice caution on full year targets. All other insurers in STOXX Europe 600 have met or beaten forecasts according to StarMine. "To an extent Zurich has been hurt because they are more exposed to the U.S. and there was more weather and catastrophe events there," said Ben Cohen, analyst at Cannacord Genuity.
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