UK stock closing: Euro zone equities sank to two-month lows on Wednesday, with investors locking in profits on a half-year rally, spooked by a run of weak corporate earnings and signs of growing political tensions in the euro zone.
France and Germany showed signs of disagreement over the euro exchange rate, whose recent strength threatens corporate profits and a nascent economic recovery in the region.
France said it would raise concerns about the euro at a finance ministers' meeting next Monday, but expectations of any action cooled after the spokesman for German Chancellor Angela Merkel said the currency is not overvalued.
The apparent disagreement further fuelled concerns about stability in the euro zone, adding to uncertainty over the outcome of upcoming Italian elections and a corruption scandal in Spain and prompting some investors to bank gains on a 25 percent rally in euro zone blue chips since June.
"It's probably quite a good time to take profits," said Robert Quinn, chief European equity strategist at S&P Capital IQ. "We're looking at a period of consolidation in the short term and most of the visible risks seem to be at the beginning of the year."
The EuroSTOXX 50 gauge of euro zone blue chips fell 1.3 percent to 2,617.35 points, its weakest finish since early December and further retreating from 1-1/2 year peaks of 2,754.80 points set last week.
The pan-European FTSEurofirst slipped 0.2 percent to 1,152.12 points, its losses tempered by a solid performance from UK blue chips.
Confidence in the euro zone could face further tests on Thursday, when Spain is looking to issue up to 4.5 billion euros of bonds and the European Central Bank is likely to face tough questions about the currency after its monthly meeting on rates.
Implied volatility on the EuroSTOXX 50, seen as a crude barometer of investor risk aversion, jumped 5 percent. The stock rally's top performers turned in to the biggest losers, with euro zone banks, which had surged nearly 13 percent in January, off 1.6 percent on Wednesday. The sector also tends to be the most sensitive to turns in the euro zone sentiment due to their sovereign bond holdings.
"There is a financial sell programme in the market this afternoon and the EU ex UK banks index broke the 50 day moving average, which triggered stop-loss selling," said a trader.
Corporate reports added to the cautious mood, French builder Vinci warning of a flat 2013 for its construction and concessions businesses, while both Swedish lender Handelsbanken's and farm chemicals maker Syngenta undershot expectations on operating profit.
So far, half of euro zone's large and mid-cap companies have missed full year earnings forecasts, prompting analysts to cut their 2013 expectations by 1.9 percent over the past month, according to Thomson Reuters StarMine. The UK looks relatively healthy in comparison, with only 32 percent of misses.
"The risk for earnings downgrades in the European equity space is relatively higher, given both ... the slightly elevated level of the consensus estimate - and also the short to medium-term effect that we think this (strong) euro effect is going to have over the next few quarters through translation losses, FX losses and export competitiveness losses," said Ashish Misra, head of investments at Lloyds TSB Private Banking.
However, in the longer term, he still sees strong prospects for stocks, staying "modestly overweight" on both UK and Europe.
"This correction which is now starting, hasn't really taken anyone by surprise. European equities are up 25-30 percent since last summer so it's not bad thing that they are pausing for breath," Misra said. "We see this as a reasonably shallow 5-7 percent, definitely single, digit correction."