Geopolitical tensions dent European shares; airlines extend fall

Mon Jun 16, 2014 10:14am EDT

* FTSEurofirst 300 down 0.2 pct, Euro STOXX 50 down 0.3 pct

* Violence from Iraq to Kenya fuels profit taking

* Airlines, cruise operators among worst hit as oil surges

* Actelion jumps 14 pct on positive results for Selexipag

By Francesco Canepa

LONDON, June 16 (Reuters) - European stocks edged lower on Monday, adding to last week's retreat as mounting violence from Iraq to Kenya pummelled travel shares and prompted investors to cash in on recent outperformers.

Airlines and cruise operators such as Carnival and easyJet both fell more than 1 percent as Brent crude rose to near $113 per barrel on concerns over disruptions to oil exports from Iraq, the second-largest OPEC producer.

Sunni Islamist insurgents have routed Baghdad's army and seized the north of the country, threatening to dismember the state and unleash all-out sectarian warfare across a crescent of the Middle East.

While airlines tend to lock in prices for their immediate fuel needs using financial derivatives known as hedges, higher oil prices in the coming months would affect their profits from next year.

"Most of the major European airlines are around 65-80 percent hedged for the remainder of the current financial year," Jack Diskin, an analyst at Goodbody Stockbrokers, said.

"If oil prices stay at these levels, the cost of hedging ... will become more expensive and that will impact their performance next year."

The STOXX Europe 600 Travel & leisure index fell for a fourth straight session, also pummelled by a profit warning at Lufthansa last week.

Underscoring the bearish sentiment on the sector, Wizz Air, central eastern Europe's largest airline, shelved plans to list its shares on the London Stock Exchange on Monday, citing current market volatility in the airline business.

BANKS AND BIOTECH

The FTSEurofirst 300 index of top European shares was down 0.2 percent at 1,386.63 points by 1346 GMT, retreating further from a 6-1/2 year high hit last week.

The euro zone's blue-chip Euro STOXX 50 index was down 0.3 percent at 3,272.02 points.

The best-performing sectors this year were among the worst hit on Monday, with Spanish banks dropping 1.3 percent after surging 18 percent since the start of 2014.

The selloff was fuelled by comments by European Central Bank Governing Council member Ewald Nowotny, who told a newspaper the ECB's stress tests may end up being too tough.

Italy's Telecom Italia fell 4.6 percent to the bottom of the FTSEurofirst after shareholder Mediobanca said it would quit an investor pact which controls the phone company, paving the way for a possible sale of its stake.

Telecom Italia's shares had risen nearly 50 percent in the previous six months, benefiting, along with banks, from improving market sentiment towards southern European economies and policy easing measures from the ECB earlier this month.

Swiss biotech group Actelion Ltd bucked the trend, surging nearly 15 percent after it said an experimental heart and lung drug met its primary goal in a study, giving it a potential second big seller.

Trading volume on Actelion was brisk at six times its average for the past three months, compared to FTSEurofirst volume of less than half of the index's own average

GEOPOLITICS DRIVES MARKET

Investors were also rattled by violence in Kenya, where at least 48 people were killed and others wounded when more than two dozen unidentified gunmen attacked a coastal town overnight.

Elsewhere, Russia cut off gas to Ukraine in a dispute over unpaid bills that could disrupt supplies to the rest of Europe and set back hopes for peace in the former Soviet republic.

Over the weekend, 49 Ukrainian military personnel were killed when rebels shot down a cargo plane over the airport of the eastern city of Luhansk.

The cost of insuring against future swings in euro zone blue chips, as measured by the Euro STOXX volatility index, rose for a fourth straight session to take its rise for the past week to 16 percent, although it remained low in historical term at around 15 points.

"Geopolitics is driving the market again, with worrying news coming from Iraq, but also Kenya and Russia," said Guillaume Dumans, co-head of research firm 2Bremans.

"Overall, there's a lack of positive momentum since the ECB meeting."

Europe bourses in 2014: link.reuters.com/pap87v

Asset performance in 2014: link.reuters.com/gap87v

Today's European research round-up (Additional reporting by Blaise Robinson in Paris; Editing by Tom Heneghan)

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