Eurostocks off lows as Ericsson, Vodafone fightback

A fightback by telcos and telecom equipment makers, led by unfancied Vodafone and Ericsson, lifted European shares off 8-week lows in late trade yesterday, as US stocks pared losses.

But strategists doubted this was the start of a major comeback by the two depressed sectors, after recent brutal losses highlighted their structural problems, and shares remained deep in the red after German data left a question mark over the strength of recovery in Europe`s biggest economy.

"As long as the debt problems of the telecom operators are not resolved, new orders for network equipment will continue to be very low," said Gert de Mesure, head of equity strategy at Delta Lloyd Securities in Antwerp.

British banks drew some buying support as investors warmed to their steady earnings and relatively low valuations, led by Lloyds TSB which hit two-year highs, but UK insurer CGNU was the biggest blue chip faller, after disappointing figures.

At 1650 GMT, with only Frankfurt officially open for trade, the blue-chip FTSE Eurotop 300 index was off one percent, having earlier been down two per cent. This placed it in the lower half of its five-month trading range.

The DJ Euro Stoxx 50 index fell 1.44 per cent. In New York, the Dow Jones industrial average dropped 0.45 per cent to break below the psychologically important 10,000 points level to 9,943 points, while the tech-heavy Nasdaq Composite more than halved earlier losses to trade down 0.2 per cent.

As investors continued to digest a slew of earnings news, the generally lacklustre numbers and cautious outlooks forced them to reassess future profit growth and stock valuations, particularly when economic data on both sides of the Atlantic pointed to a muted recovery at best.

"We have not finished that process," said Peter Sullivan, European strategist at Goldman Sachs.

However, some strategists blamed recent market weakness on sector specifics, not just on telecoms-related issues but on the highly capitalised oil sector which has given back some of its gains as oil price gains have levelled off, and stressed the recovery story remained intact.

"We are still looking at a producer-led recovery, where the pattern of recovery goes through the phase of inventory correction and a return to industrial production as unused capacity is taken up, and eventually at the end of that chain you get investment coming back," said Michael O`Sullivan, European equities strategist for Commerzbank.

"The problem is that investment is not to going to return to health for quite some time, and any companies that depend on it, such as Ericsson, will experience problems, but that doesn`t apply to industrials which we continue to like."

Beaten down Nordic telecom equipment makers Ericsson and Nokia rose amid rumours that Nokia had won a network deal, raising hopes that some customers were still willing to dig into their pockets.

Shares in Ericsson, which issued a gloomy outlook on Monday, were up 8.8 per cent, but remained some 30 per cent down on the week. Nokia was two per cent ahead on the day.

Europe`s biggest mobile phone operator Vodafone, meanwhile, rose 4.88 per cent, having trawled four-year lows in the morning.

UK banks were also among the top blue chip advancers as investors bet they would deliver steady earnings and figured they were still undervalued, despite a recent run-up in prices that has taken the DJ Stoxx bank index.

Lloyds TSB rose one per cent, while HSBC Holdings added 0.31 per cent.

Germany`s Siemens engineering and telecom equipment group was also among the few large cap gainers, up 3.77 per cent after its second quarter results beat estimates.

"Siemens is a perfect example of a very good industrial company that has surprised on the upside in terms of earnings on its manufacturing side," said Commerzbank`s O`Sullivan.

But UK insurer CGNU led the fallers, tumbling 5.6 per cent after a 10 per cent rise in first-quarter global new business disappointed because it lagged that of its rivals.

Elsewhere, Anglo-Swedish drug firm AstraZeneca sank 5.3 per cent on news of a delay in approval for Crestor, its biggest new drug hope.

German chip maker Infineon Technologies fell 4.52 per cent amid unconfirmed talk of a placement.

Chemicals was the weakest sector, down more than three per cent as Germany`s Bayer fell 4.5 per cent ahead of its quarterly earnings today when the inventor of Aspirin is due to post a 47 per cent drop in operating profit.

Germany`s closely watched Ifo business barometer which, after five consecutive rises, fell unexpectedly to 90.5 in April from a downwardly revised 91.5 in March.

Late on Wednesday, the US Federal Reserve`s "beige book" indicated only a tepid recovery was taking place in the world`s dominant economy.