Finance jitters drive Europe stocks to 3-year low

Analysis

European shares fell to their lowest close since May 2005 on Tuesday as investors grew more jittery about the fate of American International Group and commodity stocks tracked sharply lower metal and oil prices.

The FTSEurofirst 300 index of top European companies closed 2.6% lower at 1,091.38 points, adding to a 3.6% slide on Monday. It is down about 28% so far this year. Insurer AIG plummeted on Wall Street after its credit ratings were cut, heightening analyst concerns it might file for bankruptcy and exacerbate tensions in the global financial system.

US Treasury Secretary Henry Paulson cancelled a scheduled speech to focus on financial market developments. In Europe, banks were the top negative weight on the index. UBS, Royal Bank of Scotland, BNP Paribas, HBOS, Credit Agricole, and Deutsche Bank fell between 3 and 22%. “Europe is just a residual on what is going on in the US. All eyes are on AIG and whether they can drum up the money tonight to keep them from going bankrupt,” said Philip Lawlor, chief portfolio strategist at Nomura. “There is talk the Federal Reserve could do something tonight in terms of monetary policy. However, there needs to be a synchronized effort with the ECB and (UK’s) Monetary Policy Committee for it to have some impact,” he added.

Investors were watching the Fed for its rate decision at 1815 GMT, with Fed fund futures pointing to a 96% chance of a 25-basis point rate cut. The financial sector took a further hit after Goldman Sachs said Q3 earnings plunged 70% and its revenue was lower than expected as the market slump sapped almost every business.

Interbank lending rates soared with the overnight dollar Libor rate jumping to 6.43750%, its highest rate since January 2001 and compared with 3.10625% on Monday. Across Europe, the FTSE 100 closed 3.4% lower, the German DAX was down 1.6% and France’s CAC 40 slipped nearly 2%.


COMMODITIES SLIDE

Oil stocks ended lower as crude fell more than 3.8% on rising concern that turmoil in global financial markets will further undermine fuel demand. BG Group, Royal Dutch Shell, BP, Total fell between 2.7 and 5.1%. Miners were also down as metal prices retreated. Gold fell nearly 2%, while copper dropped 1.6%.

Anglo American, Antofagasta, BHP Billiton, Lonmin, Kazakhmys, Rio Tinto, Vedanta Resources and Xstrata were down between 4.5 and 7.4%. “There has been an unwinding of cyclical commodity plays. The problem is just not in the financial sector, but it is becoming more widespread,” added Lawlor.

Among individual stocks, Volkswagen jumped 9.4% after German sports car maker Porsche said it had raised its stake in the company. Porsche was down 1.75%. (Reuters)

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