Cyprus bailout worries weigh on European shares

Last Updated: Sat, Mar 23, 2013 04:06 hrs

* FTSEurofirst 300 flat, Euro STOXX 50 up 0.2 pct

* Markets come off session lows on Cyprus bank spin-off plan

* FTSEurofirst 300 at risk of worst weekly drop since Nov.

* Investors buy "puts" due to Cyprus bailout worries

By Sudip Kar-Gupta

LONDON, March 22 (Reuters) - Fresh worries over Cyprus' bailout problems weighed on European equities on Friday, with a key regional index at risk of recording its worst weekly drop since November.

Investors erred more on the side of selling stocks on signs of any rally rather than buying on the dip due to uncertainty over how the Cypriot situation would be resolved.

Equity markets recovered from earlier intraday lows after Cyprus's presidency said there was an agreement with Greece on a takeover of the Greek units of debt-ridden Cypriot banks.

But Russia rebuffed Cypriot requests for help, raising doubts that Cyprus would secure cash to fix its debt problems.

The pan-European FTSEurofirst 300 index was flat at 1,190.72 points by around midday and at risk of recording its biggest weekly drop since November.

The euro zone's blue-chip Euro STOXX 50 index edged up by 0.2 percent to 2,689.78 points, but was still down around 1 percent from last week's close.

Cyprus needs to find 5.8 billion euros ($7.50 billion) in new money by a Monday deadline to clinch a European Union bailout, having earlier rejected a plan to raise the funds by taxing bank customers' deposits. If it cannot do so, it risks a collapse of its financial system that could push it out of the euro zone.

Most investors expect an eventual deal to help Cyprus, leading the majority to believe that any equity market fall in March and April will be a temporary one before stock markets resume an upwards trajectory as the year progresses.

In the near-term, however, investors were unwilling to take on the risk of adding significantly to equity holdings.

"The market is in a neutral to bearish phase at the moment," said XBZ Ltd European equity options broker Mike Turner.

Turner said clients had been buying "put" options, which give the right to sell an index in the future and are often used on expectations of a future market fall.

He said investors had been buying "puts" on the Euro STOXX 50 due to expire next week with strike prices ranging from 2,600 to 2,500 points - implying that some saw a possible 7 percent fall on the Euro STOXX 50 over the course of next week.

"People are keen to acquire a bit of downside protection into next week," he said.


German-listed truck maker MAN SE was the worst-performing stock on the FTSEurofirst 300, falling 4 percent after carmaker Volkswagen offered a lower-than-expected amount to buy full control of MAN.

However, a 2.5 percent rise at BP, after the heavyweight oil major said it would return $8 billion to shareholders, cushioned equity markets from bigger losses.

Lee Robinson, founder of asset management firm Altana Wealth, said a default in Cyprus would send investors to seek shelter in assets perceived as safe, such as German and U.S. government bonds .

Robinson has been seeking protection against possible swings in share prices by buying implied volatility, which often rises when investors grow more concerned about the market outlook.

The Euro STOXX 50 Volatility Index was up 4.6 percent at 20.70 points on Friday, but still below a 2013 peak of 25.90 points.

"Volatility to me is a very underpriced asset given the potential outcomes globally," said Robinson.

Goldman Sachs analysts said European equities were worth sticking with on a 12-month timeframe, although they were less compelling on a three-month timeframe.

"We consider European equities attractive for investors over a 12-month investment horizon," wrote Goldman Sachs analysts Anders Nielsen and Matthieu Walterspiler.

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