European shares slip for third session

Last Updated: Sat, Nov 17, 2012 19:12 hrs

* FTSEurofirst 300 down 0.4 pct, hits 2-month low

* All eyes on U.S. fiscal cliff talks

* Volatility index sends contrarian signal

* Despite headwinds, risks seen on the upside

By Blaise Robinson

PARIS, Nov 16 (Reuters) - European stocks slipped further on Friday as brewing worries over U.S. budget negotiations and the continuing euro zone debt crisis unsettled some investors, with banking stocks featuring among the top fallers.

The euro zone banking index was down 1.4 percent, with Portugal's Banco Espirito Santo down 4.9 percent, Germany's Commerzbank down 3.9 percent and France's Natixis down 3.7 percent.

The FTSEurofirst 300 index of top European shares was down 0.4 percent at 1,074.12 points at 1247 GMT. The index, which hit a two-month low earlier Friday, is on track to post a weekly loss of 2 percent, its worst weekly performance in 8 weeks.

Investors fretted about how the U.S. government will avoid stepping off the $600 billion 'fiscal cliff' of spending cuts and tax rises which automatically kick in in the new year without a political agreement on setting the budget. President Barack Obama and congressional leaders are set to hold talks later on Friday.

Investors fear that a deadlock in negotiations would automatically trigger the spending cuts and tax hikes, which could drag the U.S. economy back into recession.

But the despite the market's slide this week, many fund managers remain positive on the longer-term outlook for European equities.

"We're buyers of the dip," said Koen Maes, global head of asset allocation at Dexia Asset Management, which has 79 billion euros ($101 billion) under management.

"This correction is a good opportunity. It's time to cash in the gains made in credit this year and move into riskier assets such as euro zone equities. Risks premiums are still very important while sovereign bond spreads have stabilised after a sharp drop," he said.

The euro zone's blue chip Euro STOXX 50 index was down 0.5 percent at 2,450.60 points.

After surging 27 percent between early June and mid-September, the benchmark index started to lose steam, and has lost 5.8 percent since then. But it managed to outperform U.S. shares, with Wall Street's S&P 500 down 8.2 percent since mid-September.

"Despite the retreat, the momentum remains very positive for euro zone stocks, which have proved more resilient than U.S. stocks in the past few weeks," Maes said.

Around Europe, UK's FTSE 100 index was down 0.7 percent, Germany's DAX index down 0.5 percent, and France's CAC 40 down 0.4 percent.

Tech stocks bucked the trend, with SAP gaining 1.5 percent. The company's co-CEO said on Friday the group is ahead of its plan to reach more than 20 billion euros in sales by 2015.

Greece was also in focus again on Friday, with nagging concerns over the country's debt sustainability and a row between euro zone governments and the IMF over how to make Greece's huge debt manageable, blocking the release of 31 billion euros in loans that the country needs to stay afloat.

"We're waiting for a few triggers: a deal to avoid the fiscal cliff which should come before Dec. 14, Spain's bailout request, and a new tranche of aid for Greece before the end of the month," Barclays France director Franklin Pichard said.

"The downside potential is limited on the market. We're just waiting a bit before turning more aggressive," he said.

The Euro STOXX 50 volatility index, Europe's widely-used measure of investor risk aversion, was retreating on Friday, hitting a one-week low of 21.14, sending a contrarian signal while stocks dipped.

The VSTOXX, which measures the cost to protect stock holdings against potential pull-backs as it usually moves in an opposite direction to equities, has lost more than 12 percent in a week, signalling that investors were warming up to risky assets such as equities, pointing towards a potential rebound in the coming days.

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