European shares ended lower in choppy trade on Thursday on concerns that political wrangling in debt-laden Italy to form a national unity government and high bond yield levels in the country may deepen the region's two-year old debt crisis.
Although, former European Commissioner Mario Monti emerged as favourite to head a government in Italy, following Greece's lead in seeking a technocrat to pilot painful economic reforms in the country, the markets remained jittery and moved in and out of positive territory throughout the session.
The FTSEurofirst 300 index of top European shares closed 0.3 percent lower at 963.58 points after trading in a broad range of 951.15-974.27. It is down 14 percent in 2011 on worries the eurozone debt crisis could spread to other countries and threaten a fragile global economic recovery.
"Investors remain in no doubt that Italy is a serious concern for the eurozone and even the global economy as a whole," said Angus Campbell, head of sales at Capital Spreads. "If it does come to having to bail them out, then at this moment there isn't enough cash in either the EFSF or IMF pots in order to prevent them from defaulting on their outstanding debts," he said, referring to the European Financial Stability Facility and the International Monetary Fund.
Miners, which generally suffer during difficult economic conditions, were among the top decliners, with the sector index falling 1.4 percent, mirroring a sharp decline in base metals prices on poor demand prospects for raw materials. European banks, which have significant exposure to Italian debt and other peripheral eurozone countries, fell 0.7 percent. French lender Credit Agricole fell 2.3 percent as it became the latest lender to detail the effects of the debt crisis on its bottom line.
Volatile markets kept investors jittery, with the Euro STOXX 50 volatility index rising 4.8 percent. On Wednesday, the 30-day implied volatility for the STOXX Europe 600 index further rose to 27 percent and for Italy's FTSE MIB surged to 47 percent, according to Thomson Reuters Datastream.
Traders said a lot of funds were too nervous to trade volatility in the options market because implied volatility was not low enough for people to start looking to buy and there was still a probability that the volatility was going to rise up to 50-60 percent.
Didier Duret, global chief investment officer at ABN Amro Private Banking that manages 170 billion euros ($231 billion), said it had again become "underweight" equities this month after becoming "overweight" in mid-August. However, it raised its exposure to defensive sectors like telecoms and healthcare.
Traditionally defensive sectors have outperformed this year, with healthcare shares up 1.4 percent, food and beverages down 1.7 percent and telecoms down 7.8 percent. In contrast, banks are down 34 percent, while the basic resources index has fallen 28 percent.
The eurozone's blue chip Euro STOXX 50 rose 0.3 percent to 2,254,92 points. Analysts said the index found support at around 2,221 - its 50-day moving average and a 50 percent Fibonacci retracement from the September-October extremes. "Unless the index breaks support and closes below the 50-day moving average, I can see a potential to test the 2,370 resistance area, formed by the 100-day moving average and a gap, which has been left open since the beginning of November," said Dmytro Bondar, technical analyst at RBS.
He said the 2,370 level was a big pivot point on the upside, as a close above 2,386, the top of the gap, would point to a change in sentiment towards recovery. However, if it broke below the 50-day moving average on a closing basis, the next major support levels will be at 2,153 and 2,070.
Uncertain market conditions prompted investors to look for different trading strategies such as finding value stocks, preserving assets by keeping cash and taking refuge in traditionally defensive sectors. Anko Beldsnijder, managing director of MainFirst Asset Management that manages 1 billion euros, said many investors were "underweight" equities and hedge funds had just become very passive.