European shares fell yesterday, with banks slipping after US Federal Reserve said it will let most of its special liquidity facilities expire by early 2010 and global regulators proposed stricter capital rules for banks.
Commodity shares also came under pressure as a jump in the dollar to three-month highs knocked prices for crude oil and base metals, which had made sharp gains in the previous session.
The VDAX-NEW volatility index showed that investors' appetite for risky assets such as equities fell, while trading volumes on the FTSEurofirst 300 of top European shares were just 35 per cent of its 90-day daily average by midday.
At 12.18 GMT the index was down 0.6 per cent at 1,024.59 points after hitting a one-month closing high in the previous session. The index is up 23 per cent this year and has surged 59 per cent since hitting a record low in early March.
Charts suggested the index faced Fibonacci resistance at around 1,023 points - its 38.2 per cent retracement of the major fall from July 2007 to March 2009. The index has failed to convincingly break the level despite repeated attempts in the past seven weeks.
"The FTSEurofirst's short term (technical) outlook is neutral. It's still very much within its range and it looks like it's struggling here," said Phil Roberts, technical analyst at Barclays Capital.
"Probably the index will move a little bit higher, maybe to 1,050 points by the end of the year," he added.
Financials were the top losers, with the DJ Stoxx European banking sector index falling 1.8 per cent. Standard Chartered, HSBC, Barclays, Lloyds, Royal Bank of Scotland, Société Générale, UBS and Commerzbank fell 1.5 to 3.6 per cent.
The sector fell after regulators said big banks will have to set aside more profits or even raise capital as protection against hard times from 2012 under tough new proposals from the Basel Committee on Banking Supervision.
Sentiment also deteriorated after the Fed's policy-making committee left rates unchanged as expected last Wednesday but reminded it will let most of the special liquidity facilities, which have helped bolster the US banking system after last year's credit crisis, expire by early next year. Greek banks lost more than three per cent after the country suffered its second rating downgrade in a week on Wednesday, with investors worried another blow by Moody's may be looming.
National Bank, EFG Eurobank and Alpha Bank were down 2.5 to 3.6 per cent.
Deutsche Bank fell 2.1 per cent. The bank is interested in bidding for RBS's 51 per cent stake in commodities trading business Sempra, a person familiar with the situation said.
Macro-economic data also hurt sentiment. Figures showed British retail sales fell unexpectedly last month, dropping at their fastest pace since May after department stores and clothing retailers failed to repeat October's strong sales.