European shares at one-month low as US deadlock continues

European shares slipped to fresh one-month lows on Wednesday, with no signs of progress in a US political deadlock eating away at investor conviction that the country will avoid a sovereign default.

US President Barack Obama said he would only negotiate with Republicans once they agree to re-open federal government now in its second week of shutdown - and raise the debt ceiling with no conditions.

"One week ago most of the commentators said this is not really affecting the markets but now there are some second thoughts ... I would be cautious to add to risk right now ," said Gerhard Schwarz, head of equity strategy at Baader Bank.

 

"We recommend sticking with defensive positioning, looking to become more aggressive again in three to four weeks when some of the uncertainty has been removed. It's a wait and see game and trading volumes in the market are reflecting this - there is no appetite to enter big positions in risky assets."

The FTSEurofirst 300 index was down 0.3% at 1,227.05 points at 0737 GMT, hitting levels last seen in early September. The index, along with the broader STOXX Europe 600, has moved in oversold territory on the seven-day relative strength indicator.

Underscoring increased risk aversion, implied volatility on EuroSTOXX 50 has jumped 31% in two weeks to 21.4.

However, it is still only at two-thirds of the levels seen in summer 2011, during the last major debt ceiling crisis, prompting some brokers to point out the potential attraction of buying options to position for large market moves as the October 17 deadline on the debt ceiling approaches.

There are also some concerns that the third quarter earnings season - which started in the United States this week and kicks off in Europe later this month - could bring disappointments on both numbers and outlook.

Earnings concerns were among factors that prompted Morgan Stanley to downgrade Saint Gobain to 'underweight', sending shares in the building materials group 3.2% lower.

"Shares have rerated more than 30% year-to-date, but muted earnings upgrades and rising headwinds indicate expectations could fall," Morgan Stanley said in a note.

"Our lower earnings forecasts place us 5-6% below consensus expectations for operating income, presenting an unattractive risk-reward skew."

Thomson Reuters StarMine SmartEstimates - based on the views from top-ranked analysts - suggesting that this year's earnings for STOXX Europe 600 companies will miss consensus by 0.8%.