European shares sink to 3-1/2 month low in broad sell-off

Fri Aug 1, 2014 6:37am EDT

* FTSEurofirst 300 down 1.4 pct, Euro STOXX 50 down 1.5 pct

* DAX breaks below 200-day moving average

* Rising expectations of early rate hike ahead of U.S. jobs

By Blaise Robinson

PARIS, Aug 1 (Reuters) - European stocks fell on Friday for the third straight session in brisk trade, with a broad index hitting a 3-1/2 month low as tension between Russia and the West as well as concerns around losses at Banco Espirito Santo gnawed at sentiment.

Technical charts sent a strong negative signal on Germany's DAX benchmark, with the index breaking below its 200-day moving average for the first time in two years.

"The situation in Argentina, the problems with Banco Espirito Santo and geopolitical tensions, particularly with Russia, are fuelling this bout of profit taking," Barclays France fund manager Philippe Cohen said.

Argentina defaulted on Thursday for the second time in 12 years following the collapse of last-ditch talks with holdout creditors, raising worries over the outlook for Latin America's No. 3 economy.

Spanish stocks underperformed again on Friday, with Madrid's IBEX dropping 1.9 percent, as traders cited worries over Spanish companies' exposure to Latin America.

Shares in Banco Espirito Santo shed 4.5 percent, adding to its 42-percent drop on Thursday when the bank posted a 3.6 billion euro loss and higher-than-expected provisions to cover its exposure to companies owned by its founding Espirito Santo family.

Shares in France's Credit Agricole, which holds a significant stake in the bank, have lost 6.8 percent this week.

The massive loss at the Portuguese bank has dragged Europe's banking sector index down 3.4 percent this week, reviving concerns over the sector, particularly in Southern Europe, hit hard by the years-long sovereign debt crisis.

Investors have also been worrying about the impact of sanctions against Russia. This week, the European Union and the United States targeted its energy, banking and defence sectors in the strongest international action yet over Moscow's support for rebels in eastern Ukraine.

About 40 European blue-chips derive more than 5 percent of their revenues from the Russian market, including Austria's Raiffeisen Bank and Finnish tyre maker Nokian Renkaat , according to data from MSCI, while European oil majors also have significant operations in Russia.

By 0938 GMT, the FTSEurofirst 300 index of top European shares was down 1.4 percent at 1,330.81 points, a level not seen since mid-April, while the euro zone's blue-chip Euro STOXX 50 index fell 1.5 percent at 3,069.60 points, a level not seen since late March.

Adding to the negative mood, investors expect strong U.S. monthly job data to strengthen the case for an early interest rate hike by the U.S. Federal Reserve.

The Fed's ultra-loose monetary policy has helped fuel a near 40-percent rally in European equities over the past two years.

"I still think good data is good for the stock market in the long term because it means the global recovery is still on track," Tradenext trader Farhan Ahmad said.

"Short term, however, we may see some reverberation in the stock market and some further weakening."

U.S. non-farm payrolls, due at 1230 GMT, are expected to show 233,000 jobs were added last month, with the unemployment rate seen steady at 6.1 percent.

Among the top losers on Friday, shares in ArcelorMittal , the world's largest steelmaker, sank 6.4 percent after cutting its forecast for earnings this year.

French telecom group Iliad dropped 7.5 percent after making an offer for T-Mobile US Inc that set up a potential bidding war with Sprint Corp.

Bucking the trend, Europe's No. 2 insurer AXA, rose 1 percent after reporting a better-than-expected first-half net profit.

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 Francesco Canepa in London; Editing by Louise Ireland)

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