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European shares led down by airlines, Italy

Source : REUTERS
Last Updated: Wed, Sep 04, 2013 10:30 hrs

* FTSEurofirst 300 down 0.4 pct

* Ryanair drags down airlines after profit warning

* Italian bourse at 1-week lows on political jitters

By Toni Vorobyova

LONDON, Sept 4 (Reuters) - European shares edged lower on Wednesday, with Italian stocks hit by domestic political uncertainty while airlines suffered from a profit warning by Ryanair and the risk of higher oil prices in case of an attack on Syria.

U.S. President Barack Obama won backing for a Syria strike from key Congress figures. Russia did not rule out agreeing to military action if Damascus were proven to have carried out a chemical weapons attack.

Analysts at Societe Generale estimate that losses for the broader equity market will be limited unless crude prices spike to $150 - from around $115 now - although oil-dependent sectors like transport are likely to feel the pain sooner.

The airlines sector is still hurting from the European economic slowdown, as highlighted by Ryanair's warning of weak bookings. The company also forecast that Europe's airline market will be weaker than generally expected in coming months.

Shares in Ryanair dropped 12.6 percent, dragging down other airlines and making the STOXX Europe 600 Travel Index the worst- performing sector, off 2.3 percent.

"It was a shock profit warning, we are seeing one-way traffic flow of aggressive sellers and opening sellers," said Jordan Hiscott, trader at Gekko Global Markets.

"Uncertainty over a high oil price will mean further pain for under-pressure profit margins for any budget airline ... I've seen a lot of risk taken off the board simply because of the uncertainty surrounding Syria."

Among Europe's regions, meanwhile, Italy was the hardest hit, with the FTSE MIB down 1.9 percent at one-week lows on renewed uncertainty over the survival of the government.

Some Italian papers said on Wednesday Silvio Berlusconi, who faces possible eviction from the Senate following a tax fraud conviction, was considering pulling the plug on the coalition government led by Enrico Letta.

The weakness in the airlines and the Italian shares combined to see the pan-European Eurofirst 300 index fall by 0.4 percent at 1,207.25 points by 0956 GMT.

The VSTOXX implied volatility index - seen as a crude barometer of investor risk aversion - rose 2.8 percent.

"If you are afraid of the war in Syria, you should buy out-of-the money put options on equities and out-of-the money call options on oil and volatility," said Peter Garnry, equity strategist at Saxo Bank.

Indeed, there was strong demand for put options - which give the right to sell the index at a pre-set price and are thus used to position for market weakness - on the EuroSTOXX 50. For Sept. 20 expiry, strikes in the 2,625-2,675 points range were most popular, implying a fall off up to 4 percent from now.

In the near term, though, the index's losses would likely be capped by its 100-day moving average around 2,728 points , with the latest moves seen as a continued consolidation of the market's strong June-August rally, said Petra Kerssenbrock, technical analyst at Commerzbank.




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