Chemicals, US rate hike talk sap European stocks

European blue-chips ended down yesterday, wary about the prospect of rising US interest rates, with German chemicals company BASF and France's Rhodia in the firing line.

The Federal Reserve maintained its commitment to leaving rates low on Tuesday for a lengthy period and noted growth in the US economy, but said the threat of falling prices had eased.

"Less concern about the risks of deflation is one step towards policy tightening at some stage," said Nigel Richardson, senior strategist at AXA Investment Managers.

BASF ceded 1.9 per cent after it predicted global growth in the chemicals market to trail world economic growth until 2015.

Rhodia dived 15.7 per cent after the Financial Times reported the company was under pressure from creditor banks to launch a 300 million-euro rights issue before they will back a debt-refinancing deal.

But Dutch retailer Ahold bucked the trend with gains of four per cent on news that its $3.5 billion-euro rights issue was well-received and Fortis Bank saying it saw a 45 per cent upside in the share price.

The FTSE Eurotop 300 index of pan-European blue chips closed down 0.80 per cent at 932.67 points from a session high of 940.69 amid thin trade, while the narrower DJ Euro Stoxx 50 index fell 0.44 per cent to 2,660.73.

Strategists said European equity markets could become more volatile as 2003 comes to a close. But they expect that the rally, which started after the Iraq war ended still has some way to go, even if US interest rates are hiked.

US interest rates are at 45-year lows of one per cent. A 25 or 50 basis point hike is unlikely to cause any lasting damage to equity market sentiment.

"It would still be extremely accommodative," said Francois Lemoine, European equity strategist at BNP Paribas.

"The reference to briskly expanding output confirms that the recovery is on track and sustainable... any falls before end-2003 may well be buying opportunities."

On Wall Street, the Dow Jones industrial average was up 0.28 per cent at 9,950.75 points, while the tech-laden Nasdaq Composite was little changed around 1,908.94.

The Frankfurt Dax closed down 0.66 per cent at 3,820.92 led by losses of 5.6 per cent in Deutsche Post after German state bank KfW said it was selling two billion euros of stock in the postal firm via a combined share placement and exchangeable bond sale.

Commerzbank slipped 2.9 per cent after the German bank bought 4.5 million shares or nearly 20 per cent in mid-sized Polish bank BRE during a public bid that ended last week, raising its stake to 70 per cent.