LONDON/MILAN European shares turned lower in early afternoon on Tuesday to touch their lowest level in more than two years with worries about the impact on banks of sustained low interest rates keeping sentiment fragile.
The pan-European FTSEurofirst 300, which slumped 3.4 percent on Monday, was down 1.9 percent by 1251 GMT to 1,215.12 points, its lowest level since early September 2013.
The European banking index fell 3.4 percent, reversing earlier gains and after sinking 5.6 percent on Monday. The index was set for its biggest weekly losing streak since 1998 as investors fret over the threat to banks' profitability and capital strength from compressed interest rate margins.
"The mood is clearly negative. What is needed is a strong and clear message from the ECB," said Activtrades Chief Market Analyst Carlo Alberto De Casa.
Deutsche Bank shares fell 1.9 percent. Late on Monday the German bank said it had "sufficient" reserves to make due payments this year on AT1 securities. Its shares had slumped 9.5 percent on Monday on concerns about its ability to maintain bond payments.
Elsewhere in the sector, UniCredit was suspend after a fall of 6 percent as better than expected results failed to reassure investors. Credit Suisse, UBS, Barclays > were all down by more than 4 percent.
Analysts said that the banking sector was prone to further weakness in the near term. The cost of insuring bank debt against default climbed on Monday to its highest since late 2013. Borrowing costs in Spain, Portugal and Italy jumped as investors demanded a fatter risk premium over safer German paper, where two-year yields hit record lows.
"The CDS (credit default swap) market is indicating a future financial stress for bond holders in the banking sector. There are concerns that the banking sector is under-capitalised in Europe and credit conditions are sub-optimal," Lorne Baring, managing director of B Capital Wealth Management, said.
"And when combined with the global macro backdrop, with Chinese growth slowing down, there is a natural impact of it around the world and the banking sector is bearing the brunt. There could be a wave of defaults in the energy sector and that will damage the balance sheet of the banking sector."
Goldman Sachs analysts said that while there were no signs of any strain in terms of euro or U.S. dollar funding in money markets for European banks, market liquidity had nevertheless reduced.
Among the few gainers, Vestas rose 4 percent after beating earnings forecasts.
(Editing by Ruth Pitchford)
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