European stocks fell on Tuesday, retreating from near-seven month highs, as investors booked recent profits following a long-awaited deal over a new bailout for Greece that failed to dispel concerns over the outlook for the troubled country.
However, fund managers and traders said cheap valuation levels and the prospect of a second long-term funding operation by European Central Bank due next week limited the losses and should support European equities in the medium term.
At 1139 GMT, the FTSEurofirst 300 index of top European shares was down 0.6 percent at 1,084.31 points, while the euro zone's blue chip Euro STOXX 50 index was down 0.9 percent at 2,528.68 points, after hitting a near seven-month high earlier in the session.
It's a clear case of 'buy the rumour, sell the news', said Guillaume Dumans, derivatives trader and co-head of 2Bremans, a Paris-based research firm using behavioural finance to monitor investor sentiment.
Some have been buying after the Greek deal but others think it was priced in already and that this has been a great opportunity to go 'short'. Our daily sentiment indicator reflected that this morning.
Late on Tuesday, euro zone finance ministers sealed a new 130 billion euro ($172 billion) rescue package for debt-stricken Greece, after persuading private bondholders to take bigger losses and Athens to commit to deep budget cuts.
The widely-expected deal was seen as removing the risk of a messy debt default that would have had a major impact on euro zone lenders as well as on other euro zone debt-troubled countries such as Portugal and Spain.
DODGING THE ICEBERG
However, doubts remained as to whether the bailout would do much more than help Greece face its most pressing debt problems.
We've dodged the iceberg. We haven't moved out of the ice field. There are no plans for growth (in Greece), said Justin Urquhart Stewart, director at Seven Investment Management.
Banking stocks, which feature among the top gainers so far this year, lost ground on Tuesday, with Intesa SanPaolo down 3 percent, Deutsche Bank down 2.9 percent and UniCredit down 2.2 percent.
Around Europe, UK's FTSE 100 index was down 0.3 percent, Germany's DAX index down 0.6 percent, and France's CAC 40 down 0.7 percent.
So far this year, the Euro STOXX 50 has gained 9.2 percent, the FTSE 100 is up 6.3 percent, the DAX up 17 percent and the CAC up 9.1 percent.
FOCUS SHIFTS TO ECB
The brisk rally has been fuelled by the European Central Bank's massive funding operation in December, when it offered three-year money at rock-bottom interest rates, drawing demand of close to 500 billion euros ($658 billion) and easing tensions in the credit market.
The ECB is set for a second long-term refinancing operation next week and economists polled by Reuters expect it to attract roughly the same volume of bids.
You're losing cash in money markets while with Bunds you just offset the inflation so in that sense equities, with their strong dividend yields and the upside potential of the stock prices, represent an attractive asset class at the moment, said Alain Zeitouni, portfolio manager at Russell Investments, which has 108 billion euros ($143 billion) under management.
The Euro STOXX 50 trades at a dividend yield of 4.15 percent, well above its 10-year dividend yield average of 3.1 percent and the 1.98 percent yield on the 10-year German Bund .
Russell Investments is 'overweight' equities, with a positive bias towards defensive sectors generating strong cashflows, and favours euro zone stocks, which have lagged U.S. peers over the past 3 years.
In Europe, we have priced in the worst-case scenario, while in the United States, the negative risks such as the country's abysmal budget deficit aren't really reflected in prices, and earnings growth is set to lose steam. So there is scope for a catch-up rally in Europe.
The Euro STOXX 50 has gained about 45 percent since a floor hit in early 2009 during the heat of the financial crisis, while Wall Street's S&P 500 is up about 105 percent over the same period.