A profit warning by UK supermarket chain Sainsbury and weak US data led European shares lower yesterday, but a broker upgrade on Nokia and the modest rise in US interest rates helped cap market losses.
Market talk that HVB Group was about to issue a profit warning also slammed Germany's second-largest bank 3.9 per cent lower, despite financial sources saying the rumours were without foundation.
Meanwhile, Colt Telecom tumbled 34 per cent after the UK corporate telecoms company said second-quarter profit was likely to come in below market forecasts. Colt's news weighed on domestic rivals Cable & Wireless and Thus Group.
But British utility Centrica was a bright spot, up 5.1 per cent after it agreed to sell its Automobile Association auto services unit for £1.75 billion.
The FTSE Eurotop 300 index closed off 0.2 per cent at 995.9 points in the first session of the second half of 2004. The narrower DJ Euro Stox 50 index also shed 0.2 per cent to 2,806.6.
Global equity markets reacted favourably to comments from the US Federal Reserve as it increased its benchmark interest rate to 1.25 per cent from 1.0 per cent late on Wednesday.
The Fed stuck to its previous commitment to tighten monetary policy at a "measured" pace, which markets took to mean a series of small rate increases over the coming year.
"As investors realise we are seeing a normalisation of rates as the economy improves, rather than any attempt to stifle growth, we expect to see relative sector performance readjust," said Bear Stearn European equity strategist Roger Hirst.
But a report showing the number of Americans seeking jobless benefits rose unexpectedly last week weighed on the market. The weekly report was seen as a harbinger of the closely watched June non-farm payrolls report set for today.
A separate survey showed US manufacturing had softened a touch in June, even though it remained at solid levels.
The pan-European benchmark index rose 4.2 per cent in the first half of the year and the consensus among strategists points to a gain of at least similar proportions in the second half as investors switch their attention back onto solid corporate earnings.
"The underlying economic trend and relative valuations would justify a broad and largely undifferentiated upward move in the market this year," Mr Hirst said.
Mr Hirst recommended to switch from retailers, autos and utilities into technology, telecoms and insurance stocks, saying that the outperformance of consumer and defensive stocks - boosted in recent weeks by investors' focus on interest rates - was unlikely to continue.
Around Europe, the FTSE 100 shed 0.9 per cent, the DAX was off 0.4 per cent and the CAC 40 0.5 per cent weaker but the Swiss blue chip index gained 0.1 per cent.
Sainsbury fell 5.7 per cent after the UK's third-largest supermarket chain issued its second profit warning in four months and said its chairman was leaving as it continued to lose market share.
Sainsbury's warning damaged other British supermarkets, with market leader Tesco down 1.4 per cent and Morrison Supermarkets off 2.8 per cent.
Germany's Metro also fell as German data showed retail sales in Europe's largest economy had fallen by a much larger than expected 5.2 per cent year-on-year in real terms in May.
Elsewhere, Swiss Re fell 1.2 per cent after announcing it would tap investors for cash with a mandatory convertible bond to help it finance the acquisition of Britain's Life Assurance Holding Corp. for £333 million.
On the upside, tech bellwether Nokia gained 1.4 per cent after Deutsche Bank upgraded the stock to "buy" from "hold", saying the market was underestimating the world's biggest mobile phone maker's economies of scale.
On Wednesday, Goldman Sachs had said there was a glimmer of hope for the Finnish manufacturer, which issued a profit warning in April.
By 1615 GMT, the Dow Jones industrial average was off 1.1 per cent to 10,322, while the technology-laced Nasdaq Composite Index fell 1.6 per cent to 2,015.8.