European shares slide on doubt over US recovery

European shares dropped for a fourth straight session yesterday as the slowing pace of US job creation signalled economic recovery could be losing steam just as interest rates have started to climb.

Technology was hit hardest as chip-related shares Philips, ASML and Infineon fell after Morgan Stanley cast doubt over the outlook for third-quarter revenue from global chip bellwether Intel.

In addition, worldwide sales of semiconductors jumped 37 per cent in May to their highest level since December 2000 but Citigroup Smith Barney said the cycle had peaked.

European technology leader Nokia also gave back a good part of its gains for the week.

Meanwhile, a six per cent drop in US car sales last month to their weakest level in six years rattled European car exporters. DaimlerChrysler and Volkswagen both fell nearly two per cent.

Volkswagen also suffered from a cut in its debt rating as ratings agency Moody's said there was a continued overall declining trend in the German group's operating performance.

UK grocers sank again as William Morrison tumbled 11 per cent to 200 pence after it became the second UK supermarket to warn on profits in as many days. The family-run grocer blamed a continuing slide in sales at newly acquired Safeway.

UK supermarket leader Tesco was off 1.5 per cent. The FTSE Eurotop 300 index closed down 0.7 per cent at 989.09 points, its weakest close in a month and down 1.6 per cent for the week, as trading volume remains average at best.

"The market seems to have hit a wall. There is uncertainty coming out of the macro data, profit warnings, and the US payrolls today," said Michael O'Sullivan, a strategist at State Street Global Advisers. "The earnings season beginning next week should provide more good news than bad. Compared to history there have been relatively few pre-warnings," Mr O'Sullivan said.

The DJ Euro Stoxx 50 index fell 0.8 per cent to 2,783.99 points.

European shares extended their losses after news that only 112,000 new US jobs were created last month, half the amount economists had expected.

The number of hours worked also shrank, while new-job totals for April and May were revised down, though June still represented the 10th straight month of jobs growth.

"It's consistent with a little bit of momentum coming out of the recovery," said Richard Reid, an economist at Citigroup.

The Economic Cycle Research Institute said the pace of US economic growth dropped to the lowest level in well over a year.

European companies depend on the US recovery to sell more goods such as cars and chemicals as the eurozone revival remains sluggish.

On Wednesday, the Federal Reserve raised US interest rates by a quarter point, its first increase in four years, but economists said yesterday's data would help ensure the central bank keeps to its "measured" approach with regard to further hikes.

"It will make the market feel that, coming on heels of evidence that momentum is coming out of the industrial recovery, that the Fed will stick to a non-aggressive policy course, and will now be much more influenced by how inflation looks," Mr Reid said.

Investors took refuge in defensive areas like drugs and utilities, the latter kept aloft after Deutsche Bank increased its price target on Germany's RWE to €46 from €41.50.