Banks and miners led European shares lower yesterday as investors worried that higher interest rates would dent business, with the Federal Reserve expected to bump up US borrowing costs.
"Clearly the cycle of rising global interest rates has only just started, and this is likely to make it a very tough environment for equities through the second half of the year," said Geoff Langham, head of trading at CMC Group in London.
Some oil groups were hit by a slide in crude oil prices to a two-month low, while a drop in gold bullion below the psychologically important $400 an ounce level weakened mining stocks such as Anglo-American.
But there were bright spots, with shares in Belgian retailer Colruyt racing to a record high after several banks raised their rating on the discount chain following better-than-expected full-year results.
BAE Systems rose four per cent to 218 1/4 pence after analysts at UBS bank said Europe's biggest military contractor could generate over one billion pounds more cash this year than it indicated in February.
Airlines rallied after data showed international passenger numbers jumped in the first five months of 2004. British Airways was up 2.3 per cent at 278-3/4 pence, while Deutsche Lufthansa gained three per cent to €11.23.
The FTSE Eurotop 300 index of pan-European blue chips ended down 0.45 per cent at 1,006.61 points, easing from Monday's two-month high.
Three stocks fell for each two that rose in moderate volume. The narrower DJ Euro Stoxx 50 index fell 0.4 per cent to 2,828.59 points.
Stocks have struggled to make headway in recent months as concerns about rising interest rates have overshadowed strong economic data and earnings growth.
Auto makers gave up most of their gains from the previous session after a senior official at General Motors said US new vehicle sales have been weaker than expected in June.
Credit Suisse First Boston investment bank warned against exposure to the US auto market and recommended selling DaimlerChrysler and Renault to buy BMW.
DaimlerChrysler shares were down 0.9 per cent at €38.6 and Renault fell 0.8 per cent to E62.95. BMW advanced 0.25 per cent to €36.33.
Shares in German stock exchange operator Deutsche Boerse fell 1.9 per cent to €42.34 after French brokerage Credit Agricole Cheuvreux cut its rating on the stock, citing a deterioration in trading-related business.
British tobacco company Gallaher Group's cigarette volumes rose over six per cent in the first five months of 2004, but it said trading in continental Europe was difficult, pushing its shares down 2.2 per cent to 686 pence.
Markets fully expect the Fed to impose its first rate rise in four years today when it concludes a two-day meeting, but uncertainty remains about the speed and extent of further anticipated rate increases as the economy recovers.
US consumer confidence jumped to a two-year high of 101.9 in June from 93.1 in May as labour market conditions improved and gas prices dipped from recent peaks.
But economists said the Fed was more concerned with inflation and current levels still pointed to a "measured" approach to interest rates by the central bank.