European shares sag as oil drops

LONDON (Reuters) -- European shares fell in early trade on Tuesday as political risk reared its head with a reported missile launch by North Korea, further dampening a rally that has added a third to equities since early March.

At 0755 GMT, the FTSEurofirst 300 index of top European shares was down 1% at 849.46 points, on track for its third day of falls in the last four.

The index, which is up 33% since hitting a lifetime low on March 9, was weighed down by oils, with BP, Royal Dutch Shell and Total (TOT) falling 1.1-1.6%, tracking a $1.05 per barrel fall in crude.

French foods group Danone tumbled 7% after saying it planned a near €3 billion rights issue, and Rio Tinto fell 3% after agreeing with Nippon Steel to cut key iron ore prices by a third.

North Korea fired two short-range missiles on Tuesday off its east coast, Yonhap news agency quoted a South Korean government source as saying. On Monday, the reclusive state tested its second nuclear device.

Analysts said the moves had underlined political risk as a factor in markets but stressed that investors were in wait-and-see mode anyway.

"We are stuck in the middle of nowhere, between the 200-day moving average and 30-day moving average, with investors not wanting to take a clear position before any trend is confirmed," said Thierry Lacraz, strategist at Swiss bank Pictet.

"I would expect the North Korea political event to weigh on the market for one or two days, not more -- markets are waiting for new macro data, new announcements, and volumes have diminished a lot in the past three weeks."

U.S. consumer confidence data is due later in the day.

Across Europe, Britain's FTSE was down 0.8%, Germany's DAX down 1.4% and France's CAC down 1.3%.

The recent wobble notwithstanding, European stock markets are on track for their third successive month of gains, the first time in two years that they have had such a long winning streak.

The 33% surge since March 9 has been powered by improving macroeconomic data and results from some big companies that have beaten analyst forecasts.

Year to date, mining stocks have risen by red-hot 38%, while banks, battered through 2008, have staged a handsome comeback with a 21% rise.

Analysts said they expected profit margins to remain fairly resilient in this cycle.

"We estimate that the market is pricing in an earnings decline that is about twice as much as we expect, while, on many measures, we perceive valuations to be the most attractive they have been in 20 years," Nomura strategists said in a note.

Risks to the stock market rally could come from negative macro data. Underlining the fragile basis of the rebound, data showed that Germany's economy contracted by 3.8%, a record pace, in the first quarter of 2009.

Other shares on the rise on Tuesday included beverage can manufacturer Rexam, which rose more than 3% to top British gainers on a Goldman Sachs upgrade.