Vodafone u-turn, valuation fears hit eurostocks

European shares slumped to three-week lows in late trade yesterday, as Wall Street turned weaker on renewed valuation and earnings fears, which spread to Vodafone, reversing its earlier results-inspired gains.

A disappointing trading update from Britain`s Barclays also dragged on banks, and was matched by losses in the equally heavyweight oil sector as US crude oil prices drifted down.

"The US market is trying to play the US recovery from a level where it is already overvalued," said Michael O`Sullivan, a pan-European equities strategist at Commerzbank, who also blamed growing investor nervousness ahead of a trading update due on June 6 from tech bellwether Intel, which also had its earnings estimates slashed by Merrill Lynch.

At 1620 GMT, with most markets closed, the FTSE Eurotop 300 index was down 1.08 per cent at 1,186 points, some nine points off the bottom of its six-month trading range, while the narrower Euro Stoxx 50 index lost 0.91 per cent.

In New York, where dealers were returning from a long weekend, the Dow Jones industrial average shed 1.21 per cent and the tech-laden Nasdaq Composite lost 1.49 per cent.

Vodafone slipped 2.14 per cent having sparked telecoms sector gains in the morning with a better-than-expected 44-per cent rise in annual core earnings. But concerns remained over the firm`s future growth prospects.

"Vodafone`s operating performance was better-than-expected, but the company said it was sticking to its guns in terms of being a 3G (next generation phone) player, and equity markets have shown themselves to be better distributors of capital over the last 18 months than (Vodafone Chief Executive) Chris Gent," Commerzbank`s O`Sullivan said.

Barclays lost 4.35 per cent and was the region`s biggest blue-chip faller after Britain`s fourth-biggest bank said in a quarterly trading statement that costs and bad debt provisions continued to rise.

Fellow British banks Lloyds TSB, HSBC and Royal Bank of Scotland each lost between 1.3 per cent and 1.6 per cent each in sympathy, pressuring the DJ Stoxx index of European bank shares which earlier this month touched ten-month highs.

Europe`s biggest company BP and Anglo-Dutch oil major Shell fell by more than two per cent each and pressured the DJ Stoxx index of energy stocks, which was the day`s worst sectoral performer, ahead of banks.

But at least France Telecom clung on to the bulk of its gains, rising 4.4 per cent, helped by a report in French daily Les Echos that the telecom operator was near to completing a deal with its German affiliate MobilCom that would not involve absorbing all of its debt.

France Telecom`s mobile arm Orange gained 3.41 per cent after saying it expected to reach an EBITDA margin of 40 per cent in France and 35 per cent in Britain by 2003 to 2004 - earlier than expected.

Dutch publisher VNU rose 2.29 per cent after it agreed to buy a 28 per cent stake in a Romanian telephone directories business for $6.0 million, seemingly quashing repeated rumours that it planned to shift out of the high-margin directories business.

Expectations of improved earnings growth, meanwhile, helped French retailer Carrefour extend its recent good run with a further gain of 1.53 per cent.

The stock has rallied by nearly ten per cent so far in May but is nine per cent weaker in the year-to-date.

In terms of economic data, the Conference Board said its closely watched index of US consumer confidence rose to 109.8 in May from a downwardly revised 108.5 in April, which was close to analysts` forecasts of a rise to 109.0 but still below March`s reading of 110.7.

"Recovery remains on track but the problem for equity markets broadly is that they are still on high valuations, which means the upside is limited," said John Calverley, chief economist and strategist for American Express Bank, who nonetheless held out hope of a better second half to the year.

"Having said that, as profits start to come through over the next few months, that`ll make the market more comfortable and we`ll probably be able to pick up a bit."