(Recasts with closing levels, details, quotes)
* FTSEurofirst 300 down 1.2 pct, hits 3-1/2 month low
* Portugal mulls use of state funds to help Espirito Santo
* Investors rattled by Argentina's default, Russian
* DAX breaks below key level in huge trading volumes
By Blaise Robinson
PARIS, Aug 1 European stocks sank in huge
volumes on Friday for the third straight session, with a broad
index hitting a 3-1/2 month low, hurt by concerns over losses at
Banco Espirito Santo as well as tension between Russia
and the West.
Shares in Banco Espirito Santo sank 40 percent, adding to
its 42-percent plunge 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
The massive loss at the Portuguese lender has dragged
Europe's banking sector index down 3.5 percent this
week, reviving concerns over the sector, particularly in
southern Europe, hit hard by the years-long sovereign debt
Portuguese authorities are considering the use of public
funds to shore up Banco Espirito Santo's capital, complementing
new money from investors, people close to the process said on
Banco Espirito Santo has been targeted by hedge fund short
sellers, betting on the stock to drop.
According to data from Markit, about 6 percent of the
group's shares are out on loan, making it one of the most
shorted stocks across Europe. The paper gain for hedge funds
this week on Banco Espirito Santo's stock meltdown represented
roughly 110 million euros ($147 million), according to Reuters
Short selling - a trading strategy popular with hedge funds
- involves borrowing a security and selling it, betting that the
price will fall. Short sellers then buy it back at a lower price
and return it to the lender, pocketing the difference.
The FTSEurofirst 300 index of top European shares
ended 1.2 percent lower on Friday, at 1,332.68 points, a level
not seen since mid-April.
"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.
The euro zone's blue-chip Euro STOXX 50 index
lost 1.4 percent. Germany's DAX fell 2.1 percent, with
trading volumes nearly twice the index's average daily volume in
the past three months.
Technical charts sent a strong negative signal on the DAX,
with the index breaking below its 200-day moving average for the
first time in two years.
Investors have been worrying about the impact of sanctions
against Russia. About 40 European blue-chips, including many
German companies, derive more than 5 percent of their revenues
from the Russian market.
Adding to investors' concerns, data showed on Friday euro
zone manufacturing growth failed to accelerate as expected last
month despite factories barely raising prices, with growing
tensions in Ukraine weighing on sentiment.
Spanish stocks also underperformed again on Friday, with
Madrid's IBEX dropping 1.8 percent, as traders cited
worries over Spanish companies' exposure to Latin America
following Argentina's default.
European shares slightly trimmed losses in afternoon trading
after data showed U.S. job growth slowed more than expected last
month, soothing concerns of an early interest rate hike.
The Labor Department said on Friday nonfarm payrolls
increased 209,000 last month after surging by 298,000 in June,
missing economists' expectation of an increase of 233,000 jobs.
"The number was a fairly big miss, but it means the
Americans may hold off a little bit longer from raising rates,"
said Joe Neighbour, trading analyst at London-based firm Central
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 Sudip Kar-Gupta in London; Editing by