European rally fades as recession fears return

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European equities edged lower on Thursday in spite of a rally by oil stocks as jitters about a global recession put banking shares under pressure and uncertainty about the passage of a US bail-out dented carmakers.

The FTSE Eurofirst 300 index of top European shares slid 0.7 per cent to 853.81, snapping a three-session winning streak. In Germany the Xetra Dax lost 0.8 per cent to 4,767.20 while in Paris the CAC 40 retreated 0.4 per cent to 3,306.13.

Finland’s top magazine papermaker UPM-Kymmene dived, after warning fourth-quarter operating profit would to come in below last year’s levels after a worse than expected drop in sales. Shares in UPM fell 8.6 per cent to €9.53.

Industry peer Stora Enso dropped 5 per cent to €5.85 while M-Real lost 5.1 per cent to €0.93.

News that prospects for a US Congress-backed plan to bail out embattled carmakers could be hamstrung by hostile Republican senators knocked European sector players.

In Germany, Daimler and BMW fell 3 per cent to €25.11 and 0.8 per cent to €22.44 respectively while France’s Peugeot lost 1.7 per cent to €13.34 and in Italy Fiat shed 5 per cent to €5.48.

In the banking sector, Fortis surged 15 per cent to €0.94 after the Belgian government said it no longer rules out handing its 11.6 per cent stake in French bank BNP Paribas to Fortis. BNP’s shares rose 1.3 per cent to €46.73.

However, sentiment in the wider sector remained jittery after Jean-Claude Trichet, European Central Bank president, said the world was not yet out of the financial storm, and that government bank rescue deals must be temporary.

Rival Société Générale shed 1.6 per cent to €38.87, while in Switzerland UBS sank 1 per cent to SFr15.75 and Credit Suisse dropped 1.5 per cent to €32.22.

Shares in Zara fashion store owner Inditex rose 4.5 per cent to €30.52 after it gave a reassuring outlook in spite of missing its nine-month net profit estimates.

Both Citigroup and Dresdner said that Inditex had remained relatively resilient in the face of the consumer slowdown in Europe and the medium-term prospects for the shares were good.

“Inditex’s bounce should be well supported. We recognise the group’s defensive attractions,” said Dresdner, pointing to the Spanish retailer’s growing net cash position and more limited sourcing exposure to a strengthening US dollar than peers.

Rival Hennes & Mauritz gained 0.6 per cent to SKr314.50, but Credit Suisse preferred the Swedish clothing brand to its Spanish rival.

“We continue to favour H&M where cost issues are less pronounced and exposure to problem economies is less. We would not expect H&M forecasts to erode as quickly, nor stay depressed for as long, as at Inditex,” said Tony Shiret at Credit Suisse.

Energy stocks rose, bolstering the market after crude rallied the best part of 10 per cent as Saudi Arabia confirmed output in November was in line with its Opec target.

Norway’s StatoilHydro rose 7.5 per cent to NKr116.60, Italy’s ENI added 1.3 per cent to €18.25, in France Total gained 2.3 per cent to €41.39 while Spain’s Repsol was up 1.1 per cent to €15.32.

Meanwhile, pharmaceutical stocks extended their losses after the European Commission on Wednesday made concessions to companies that resell prescription drugs.

Ireland’s Elan shed 1.3 per cent to €5.4 and in France Sanofi-Aventis dropped 2.4 per cent to €44.03.

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