LONDON European shares fell in choppy trade on Wednesday as corporate and economic data offered new evidence the European crisis was taking its toll on global growth, leading investors to position for further volatility.
Shares in the world's largest bearings maker, SKF AB (SKFb.ST), fell 7.3 percent to lead a selloff in industrial stocks after the manufacturing bellwether warned of weakening demand due to the euro zone debt crisis and a slowdown in China.
It was the top faller on the FTSEurofirst 300 .FTEU3, which closed 0.3 percent lower at 986.95 points, having traded 90 percent of its 90-day volume average.
"We're still in an environment where the macro trend is deteriorating and we think that most recent news flow from the corporates is becoming worrying as well," Emanuel Cau, a strategist at JPMorgan, said.
"Our advice is to sell any rally as long as the macro backdrop doesn't improve."
Retail sales data showed on Wednesday that U.S. consumers were turning more cautious and an influential Chinese government adviser was quoted as saying China's annual growth rate could fall below 7 percent in the second quarter.
In this context, Cau expected earnings estimate to be cut in coming months, reflecting worsening macroeconomic indicators, resulting in further underperformance for cyclical stocks.
He preferred defensive sectors, such as healthcare .SXDP and consumer staples .SXRP .SXDP, which added 0.5 percent and 0.6 percent as the only sectors that rose on Wednesday.
He also favored telecoms .SXKP, which offer a 11.7 percent dividend yield according to Thomson Reuters data.
The world's largest clothes retailer, Spain's Inditex .ITX.MC, showed defensive qualities as it reported a higher-than-expected profit increase thanks to demand from cash-strapped consumers in Europe and fashion-hungry shoppers in Asia, sending its shares up 11.6 percent.
That helped offset losses on the Euro STOXX 50 .STOXX50E index, which closed flat at 2,143.50 after a late recovery.
That showed investors were reluctant to add to their short positions on euro zone blue chips, which have fallen 18 percent since late March and could rebound on any positive announcement from policymakers.
"There is scope for short squeezes and short term-rallies," JPMorgan's Cau said. "Hedge funds are net short equities: the market has the capacity react positively on newsflow."
But the cost of insuring against future share price swings in the index, as measured by the Euro STOXX 50 index .V2TX of implied volatility, rose 4.5 percent, showing investors were using options to take protection in case of adverse events in the euro zone.
More market jitters would be triggered if Greek elections at the weekend do not return a government that is committed to the country's bailout.
"We suspect from the slow grind higher in (volatility) that a number of people are already hedged going into the weekend," Abhinandan Deb, European head of equity derivatives research at Bank of America Merrill Lynch, said.
"Right now not many people are participating on the cash market and volumes are low in general. People are waiting it out."
(Editing by John Stonestreet)