Eurostocks sink as financials reel, US data eyed

Swirling rumours sent investors fleeing from top financials such as Credit Suisse and Deutsche Bank to push European shares sharply lower by mid-session yesterday ahead of the week's key economic data.

Dutch employment agency Vedior was a bright spot, its shares jumping 7.4 per cent after saying it had no plans to issue fresh equity. Oil stocks were also buoyed by steady crude oil prices.

"The story du jour is financial sector weakness," said Michael O'Sullivan, European strategist at Commerzbank.

Financials, banks and insurers were the top three weakest sectors, followed by technology and healthcare.

By 1044 GMT, the FTSE Eurotop 300 index was down 1.7 per cent at 830 points as last week's five-and-a-half year closing low of 808.62 points beckoned.

The narrower DJ Euro Stoxx 50 index shed two per cent to 2,258 points.

"It's a kind of market where no one is prepared to catch a falling knife and where you start with nasty rumours. The balance sheet of banks are black holes, no one knows what's there, and the profit warnings we have had from banks like Bank of New York have confirmed the worst rumours," O'Sullivan said.

Credit Suisse sank to its weakest level in nearly a decade, extending Thursday's 14-per cent slide amid fears of a hefty third-quarter loss and persistent rumours the group may need to raise fresh capital to help finance its loss-making insurance business.

The stock was down 15 per cent after already losing two-thirds of its value this year, but dealers said the slide was overdone.

"It's a blood bath. This is totally exaggerated," said Christoph Ritschard, banking analyst at Zuercher Kantonalbank.

Deutsche Bank sank 6.9 per cent as speculation it might issue a profit warning compounded the impact of the banking sector's woes.

Elsewhere in financials, J.P. Morgan analysts cut their price targets and earnings forecasts on Benelux group Fortis and Dutch group ING.

Fortis sank 4.5 per cent, while ING shed three per cent. The DJ Stoxx financial sector index sank four per cent to its lowest level ever.

Technology shares came under the cosh after US data storage company EMC Corp posted a wider-than-expected quarterly loss late on Thursday.

The mood in the sector was soured further after French telecom equipment maker Alcatel said the market would continue to contract in the second half of 2002.

Alcatel shares dropped five per cent. Healthcare stocks were pressured by an earnings warning from US drug group Schering-Plough. European drug leader GlaxoSmithKline dropped four per cent.

Dutch publisher Wolters Kluwer bucked the downward trend in the media sector to gain 3.6 per cent after sources told Reuters that four parties are set to enter binding bids topping €550 million for Kluwer's academic publishing division.

Elsewhere in the sector, Financial Times publisher Pearson rose 3.7 per cent after WestLB bank named it as one of its top picks in the sector.

Shares in news and information group Reuters Group shed six per cent after debt ratings agency Moody's Investors said it may cut the firm's long-term rating.

Rate wish Economic news in Europe continued to worsen yesterday. The euro zone's dominant service sector shrank in September, with the Reuters Eurozone Business Activity index dropping below the critical 50 line that divides growth from contraction.

Deutsche Bank cut its forecast for German growth this year to 0.1 per cent, citing a mini-recession, and the French national statistics office also cut its growth forecasts for the euro zone's second largest economy.

"The euro zone data is increasingly appalling and there are no real signs it's going to improve," said Paul Mackel of Dresdner Kleinwort Wasserstein investment bank in London.

"The key thing is the way European equity markets have been trading. We have all this data coming out and it doesn't really support earnings potential for euro zone corporates."

The US non-farm payrolls and unemployment numbers will offer the latest insight into whether US recovery has stalled.

Economists polled by Reuters forecast that payrolls in September grew by a modest 5,000 with unemployment rising to 5.9 per cent from 5.7 per cent.

There is already talk in the market that a bad set of numbers would spur the Federal Reserve to cut interest rates, perhaps before its next meeting in November.

But many analysts believe there is a greater chance of the European Central Bank, which meets next Thursday, will cut before its US counterpart due to deteriorating euro zone data.

"Watch out for a lot more noise on the ECB and Fed next week, with people saying the ECB has more excuse to cut now," said Commerzbank's O'Sullivan.