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Europe: Shares mark worst week this year as geopolitics bites

[LONDON] A sell-off in heavyweight basic resources stocks prompted a third day of losses for European shares on Friday, posting their worst week this year amid a ramp-up of tensions between the United States and North Korea.

Volatility jumped and the pan-European Stoxx 600 fell 1.1 per cent, taking weekly losses to 2.8 per cent, its worst since early November 2016.

Euro zone stocks and blue-chips also dropped 0.9 per cent, while the miner-heavy FTSE fell 1.1 per cent.

The losses have been triggered by a standoff between Washington and Pyongyang, as the war of words between the two intensified.

Market voices on:

"Investors have been anticipating that we are due a correction of some sort," said Paul Harper, European equity strategist at DNB.

"To some extent they have been expecting something and have just been looking for the catalyst. But if investors are positioned for this already, you are going to need something more to give it significant legs as some might be tempted to buy the dip," he added.

The VStoxx, the main European gauge of equity investor anxiety, jumped to a near four-month high, though it remained close to historically depressed levels.

"It's a big move in the context of what we've seen in the course of this year, but in a bigger picture perspective the levels are still relatively moderate," said Mr Harper.

On Friday basic resource stocks dropped 2.6 per cent to a month low as metal prices fell.

ArcelorMittal, Rio Tinto, Glencore, Antofagasta, Anglo American, BHP Billiton and all fell 2.3 to 4.5 per cent.

Falling crude prices made oil & gas stocks a weight too, dropping one per cent with Tullow Oil the biggest faller.

Banks also fell 1.6 per cent, with the sector posting its worst week in nine months.

Drugmaker Galapagos was the sole bright spot, up 4.8 per cent as brokers upgraded their view on the stock which also outperformed on Thursday after a successful drug trial.

UK mid-cap Dixons Carphone was the worst-performing, falling more than 7 per cent after a top-rated Exane BNP Paribas analyst cut the retailer by two notches to "underperform", citing concerns about its mobile business.

With most companies having reported second-quarter earnings, a divergence was increasingly visible between euro zone corporates, whose earnings are dented by a stronger euro, and the broader pan-European index.

Overall, earnings growth for MSCI Europe companies was tracking 24 per cent, Thomson Reuters data showed, while MSCI Euro zone companies were seeing 16 per cent earnings growth for the second quarter. Around 80 per cent of companies have reported.

"Results have been fairly OK, but the reaction to the results has been on the soft side... which perhaps suggests investors are increasingly nervous that valuations are getting to unsustainable levels," said DNB's Mr Harper.