* FTSEurofirst 300 down 1.7 pct, Euro STOXX 50 down 2.6 pct
* Indexes post biggest drop since June, fall to 1-mth low
* Syria strike threat fuels profit taking on summer rally
By Francesco Canepa
LONDON, Aug 27 (Reuters) - European stocks suffered their
biggest daily drop in two months on Tuesday as the threat of a
military strike against Syria prompted investors to take profit
on some of this summer's best performers and to buy insurance
against future losses.
U.S. allies were drafting plans for air strikes and other
military action against Syria, causing investors to ditch stocks
in favour of assets less exposed to global economic conditions,
such as German and U.S. government bonds
The euro zone's blue-chip Euro STOXX 50 index
closed down 2.6 percent, its biggest daily drop since June,
leaving it at 2,749.27 points, its lowest level in a month.
Volume on the Euro STOXX 50 was the highest since Aug. 16 as
66.7 million shares were traded, 15 percent more than the
index's 90-day average.
The cost of buying options to protect against future market
swings, as measured by the Euro STOXX 50 volatility index
or VSTOXX, jumped 23.8 percent, the most since February,
to a 1-1/2 month high of 22.17 points.
"The Syria story is adding a lot of pressure and is acting
as a catalyst," Vincent Cassot, head of equity derivatives
strategy at Societe Generale in Paris, said.
"If there is some real escalation in the Middle East (the
VSTOXX) can hit 30 very easily."
He said the prospect of an imminent reduction to the Federal
Reserve's asset-purchase programme was the underlying driver of
market volatility, which he expected to rise further in the
run-up to the U.S. central bank's policy meeting on Sept. 17-18.
The Fed's stimulus, along with other bond-buying schemes by
global central banks, has helped lead a 34 percent rally in the
Euro STOXX 50 since June 2012. The index has pulled back 3.6
percent since mid-August as investors positioned for a cutback
in the Fed's programme.
The pan-European FTSEurofirst 300 index of top
European shares ended down 1.7 percent at 1,202.36 points,
trimming its gains since the start of July to 4.4 percent.
Automotive and banking stocks were the worst
hit, skidding around 3.7 percent and 3.1 percent, respectively.
The sectors have led the European equity rally this summer
as improving data prompted investors to switch into companies
focused on the European economy.
Europe's earnings momentum, however, remains negative at
minus 3 percent. That is an indication that despite a recent
batch of better-than-expected company results, analysts continue
to downgrade their profit forecasts.
Falling profit forecasts at a time of rising share prices
have left the broader STOXX Europe 600 trading at 12.9
times its expected earnings, above a 10-year average
price-to-earnings ratio of 12.1, according to Thomson Reuters
"The full scope of (the Syria) crisis is difficult to
predict at this point, so it becomes an excuse for investors to
cash in some of the recent gains," said David Thebault, head of
quantitative sales trading, at Global Equities in Paris.