European shares post worst daily fall for a month

European shares suffered their biggest daily drop this month after gloomy earnings and weak US economic data hit sentiment yesterday and left some positioning for further falls in the near-term.

A profit warning from Saipem caused shares in Europe’s biggest oil services company to fall 34.3 per cent and sent shockwaves through the oil and gas sector.

Imperial Tobacco, meanwhile, shed 4.3 per cent after guiding for lower profits.

They both weighed on the pan-European FTSEurofirst 300 index, which closed 0.6 per cent lower at 1,171.09 points, chalking up the worst daily loss since December 28.

The index, which remained on course to record its best month since July last year, was retreating from a two-year high hit the day before, which had left it in “overbought” territory on its 14-day Relative Strength Index.

“Surely this is a little bit of a wake up call to this never-ending market rally,” Dermot Corrigan, head of derivatives trading firm, Qubed Derivatives, said.

“The (cash) market is well overbought, so a correction would be healthy. With volatility at these levels protection isn’t expensive.”

Corrigan was positioned for a rise in the volatility of option prices, which typically shows investors are trading options to protect themselves from swings in the cash market.

Volatility on eurozone blue chips, as measured by Euro STOXX 50 Implied Volatility index, rose 7.3 per cent, rebounding from lows not seen since 2007.

The underlying Euro STOXX 50 index fell 0.6 per cent to 2,732.12.

Indexes extended losses in the afternoon as data showed the US economy unexpectedly contracted in the fourth quarter, suffering its first decline since the recession ended more than three years ago.

“We do not expect a recession, i.e. another quarter with falling GDP, but a strong rebound also looks unlikely in our view,” Joost van Leenders, investment specialist for allocation and strategy at BNP Paribas Investment Partners.

He added concerns about the US economy, exacerbated by the forthcoming debt ceiling negotiations, and disappointments on the earnings front could usher in a fall of up to 10 per cent on Euro-pean indexes.

While much of the fall was seen as due to temporary factors, the report would likely provide ammunition for officials at the US Federal Reserve to stay on their ultra-accommodative policy stance, which has helped fuel a 27 rally in the Euro STOXX 50 since June.