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Renewed bank worries halt Europe stocks brisk rally

Published 09/07/2010, 07:19 AM
Updated 09/07/2010, 07:20 AM
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* FTSEurofirst 300 down 0.6 percent after sharp two-week rise

* Bank stocks drop on reports over regulation, stress tests

* Reignited Australian tax fears hit mining shares

* For up-to-the-minute market news, click on

By Blaise Robinson

PARIS, Sept 7 (Reuters) - European stocks were down around midday on Tuesday, halting a brisk two-week rally as banking stocks fell on reignited concerns over capital reform and the sector's recent stress tests.

Mining shares also featured among the top losers after Australian Prime Minister Julia Gillard secured a second term in office, with her government vowing to press ahead with a new mining tax and work towards a scheme that would force major polluters to pay for their carbon emissions.

Rio Tinto lost 2.1 percent, Xstrata shed 2.9 percent and BHP Billiton dropped 1.4 percent.

At 1047 GMT, the FTSEurofirst 300 index of top European shares was down 0.6 percent at 1,059.23 points, after gaining nearly 7 percent over the past two weeks.

The Euro STOXX 50, the euro zone's blue chip index, was down 1.1 percent at 2,723.71 points, dropping back below its 50 percent Fibonacci retracement of a fall from an April high to a May low, and falling towards its 50-day moving average, at 2,692.44.

"Banking stocks have hit the upper end of their recent range and failed to break it," IG Markets analyst Philippe De Vandiere said.

"There is just no visibility. Despite the bank's recent strong results, there are a lot of remaining question marks on the sector. We don't know what the banks will have to set aside as collateral with Basel III."

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Banks trimmed recent strong gains, with Dexia down 3.2 percent, Societe Generale down 3.1 percent, Bankinter down 2.6 percent and Intesa Sanpaolo down 2.2 percent.

The Wall Street Journal said on Tuesday the sector's recent stress tests understated some lenders' holdings of potentially risky government debt, while the German weekly Die Zeit, quoting a draft proposal from the Basel Committee, reported that global banks will be required to hold Tier 1 capital of 9 percent, including a 3 percent so-called "conservation buffer".

The Basel committee, in charge of drawing up global banking rules, was set to discuss the planned reform on Tuesday.

BARCLAYS TUMBLES

Barclays, which appointed Bob Diamond to replace current head John Varley next year, was down 3.4 percent.

The STOXX Europe 600 banking index has surged nearly 8 percent in the past two weeks, outpacing a 6.4 percent gain for the broad STOXX 600 index. The sector index is down 1.4 percent so far this year, falling behind a 2.6 percent rise in the STOXX 600.

European banks carry a 12-month forward price-to-earnings of 8.38, versus a 10-year average of 11, and a one-year forward price-to-book of 0.73, versus a 10-year average of 1.36, Thomson Reuters Datastream shows.

That compares with a one-year forward P/E of 9.96 for the STOXX 600 and a 12-month forward P/B of 1.18.

Guy de Blonay, fund manager at Jupiter AM, remains cautious on the euro-zone banking stocks.

"Risks surrounding sovereign debt, particularly in Southern Europe force us to remain on the sidelines for now," he said.

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"Instead, we seek exposure to emerging growth with stocks like HSBC ... which is in a good position for strategic acquisitions due to its excess of capital, and Standard Chartered, which gets 90 percent of its revenues from emerging markets."

Investors were also rattled by surprisingly poor macroeconomic data from Germany.

German manufacturing orders in July dropped by 2.2 percent, dragged by below-average volume in big orders, confounding expectations of a rise.

"Today's numbers just illustrate the inevitable return to a normal growth path, after the exceptional second quarter. Deriving any double-dip ideas from today's numbers would be exaggerated and very premature," ING economist Carsten Brzeski wrote in a note.

Around Europe, UK's FTSE 100 index was down 0.8 percent, Germany's DAX index down 0.6 percent, and France's CAC 40 down 1.1 percent.

The Peripheral Eurozone Countries Index was down 2.2 percent. (Editing by Karen Foster)

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