European equities tumbled on Tuesday as the prospect of higher interest rates sparked fears over the durability of corporate profits.
The FTSE Eurofirst 300 finished 2.2 per cent lower at 1,293.39 as a weak start from Wall Street added further pressure to stocks that were already sliding.
Figures showing that eurozone money supply had grown ahead of expectations in April initiated the move lower.
Lucy Hartiss, European economist at Capital Economics, said the data supported the view that the European Central Bank would raise interest rates by at least 25 basis points in June, and that a more aggressive move might be on the cards. “While there was nothing particularly new in today’s data, it may raise market expectations of a 50 basis point move at next week’s ECB monetary policy meeting,” she said.
Financial stocks were the biggest drag on the FTSE Eurofirst index as investors digested the news.
Among the biggest fallers were Julius Baer, the Swiss private bank which led the SMI index down with a fall of 5.3 per cent to SFr105.30, and National Bank of Greece, down 5.2 per cent to €31.30.
Meanwhile, Commerzbank fell 4 per cent to €28.87. It said rumours that it had suffered heavy derivative losses in the recent market turmoil were “complete nonsense”, adding it was “delighted” with the performance of its derivatives unit.
Belgian banking group KBC fell 3.6 per cent to €83.55 despite reporting a better-than-expected rise in first-quarter profits, boosted by strong sales and capital gains.
WestLB upgraded the stock from “add” to “buy”, calling the results “excellent” and saying they had beaten all expectations. “Given the strong solvency of the group, we would expect rather decent dividend payments or accelerated share buy-backs,” analysts said.
A renewed bout of dollar weakness deepened the gloom for Europe’s exporters, with companies selling into the US under particular pressure.
EADS, which controls aircraft maker Airbus and makes most of its sales in dollars, lost 4.6 per cent to €27.08 while L’Oreal - the world’s largest cosmetics maker with about 30 per cent of its sales in North America - lost 3.2 per cent to €68.75. Philips, Europe’s largest maker of consumer electronics, dropped 3.1 per cent to €24.35.
Carmakers were also hit, with Renault falling 3.1 per cent to €87.75, DaimlerChrysler off 2.2 per cent to €40.38 and BMW slipping 2.3 per cent to €40.03.
Porsche fell 2.2 per cent to €754.97 as Citigroup reiterated its “sell” rating and set a €690 price target on the stock. Analysts at Citigroup said the stock’s long bull run, which coincided with a string of model renewals and compound annual sales growth of 17 per cent over the last four years, had left the share price vulnerable to a change in rhythm. “We like the long-term potential for brand extension, but see short-term slippage as the product sweetpoint fades and currency effects bite,” analysts said.
Citigroup added that Porsche’s recent acquisition of a €3.2bn stake in Volkswagen would weigh on earnings. “The huge investment spoils the lean investment model of Porsche, and interferes with the capital return story,” they said. Volkswagen lost 2.2 per cent to €54.82.
Arcelor was one of the few Eurofirst 300 constituents to post gains, rising 0.2 per cent to €32.85 as reaction to the steelmaker’s proposed merger with Russian group Severstal continued.
On Monday, a shareholder rights group representing around 5 per cent of Arcelor small investors, wrote to the company’s chairman to voice their concerns. Meanwhile, Mittal Steel said it was pushing ahead with its hostile bid for Arcelor. The company’s European head Roeland Baan said it would be satisfied with a minority stake in Arcelor - “perhaps 40 per cent of the shares in a combined Arcelor and Severstal group” said Mr Baan.
Electricite de France fell 3.7 per cent to €41.31 and Suez lost 3.5 per cent to €29.50 on reports that the French government is looking to keep state regulation of gas and electricity prices, after the market is liberalised next year, in an attempt to secure parliamentary approval for the proposed merger of Gaz de France with Suez. Shares in Gaz de France fell 1.4 per cent to €26.05.