US earnings weigh on European shares

Pan-European share indexes closed lower yesterday as weaker-than-expected US earnings dented hopes for a strong European profit season, despite bumper results from Swiss drugmaker Roche.

Comments from Federal Reserve chairman Alan Greenspan that the US economic growth outlook was solid, inflation was contained and interest rates would keep rising was largely as expected, but disappointed some investors who had hoped an end to monetary tightening might be in sight.

A US warning that militants were planning fresh attacks in Saudi Arabia briefly pushed up crude oil prices and weighed on the oil and gas sector, which was already weak following the soft debut of the newly merged shares of Royal Dutch Shell.

The FTSEurofirst 300 index of pan-European blue chips closed 0.3 per cent weaker at 1,163 points, having tried and failed to rise beyond last week's three-year peak of 1,170 points.

The narrower DJ Euro Stoxx 50 index also fell 0.3 per cent to 3,303.9 points.

US crude prices briefly climbed above $58 a barrel after the US embassy in Saudi Arabia said a fresh attack was planned, although it had no details about targets or timing.

Strategists said the reaction was to be expected, but noted that, so far, insurgents' actions in Saudi Arabia had not had a lasting impact on oil supplies.

"We've had several bombings in Saudi Arabia in the last few years and every one of them has caused a spike in the oil futures market, but not one of them has affected oil production," said Anais Faraj, global strategist at Nomura.

Oil prices then retreated after a smaller-than-expected fall in weekly US crude supplies.

US stocks eased, with chip maker Intel Corp. and Yahoo Inc. weighing on the tech sector after their earnings missed market forecasts, while news of an unexpected quarterly loss at General Motors Corp. dragged on the Dow Jones industrial average . The Dow was 0.3 per cent lower at 10,615 points, while the Nasdaq Composite Index fell 0.2 per cent to 2,169 points by 1616 GMT.

Performance was mixed around Europe, with Zurich's SMI closing up 0.4 per cent and London's FTSE 100 and Frankfurt's DAX both up 0.3 per cent. Paris's CAC-40 ended down 0.1 per cent, while Finland's HSE fell 0.8 per cent.

UK stocks were boosted by minutes from the Bank of England's last Monetary Policy Committee meeting, which showed four of nine members voted for a cut in interest rates.

Tech heavyweights Nokia and Ericsson extended their declines after Intel disappointed and ahead of their results today. Nokia shed 2.2 per cent and Ericsson fell 1.5 per cent.

Royal Dutch Shell's new shares came under pressure as index-related buying dried up and attention switched back to fundamentals, where problems with costs and oil reserves remained, dealers said. The A shares closed down 3.2 per cent, while the B shares fell 1.7 per cent.

Roche rallied 4.1 per cent after raising its margin forecasts following better-than-expected first-half drug sales, helped by orders for its Tamiflu influenza drug and its cancer products.

Miners were strong, led by a 4.4 per cent gain for Rio Tinto after it reported record quarterly iron ore production from Australia to take advantage of high commodity prices.

Danone was another positive influence, rising 5.8 per cent on persistent speculation that PepsiCo was considering a bid for the French food group.

Strategists at SG expected a new cycle of sector consolidation in Europe as companies take advantage of high free cash flows and returns on equity, low debt levels and reasonable valuations.

Those reasonable valuations made stocks a better bet than bonds, SG added.

"Our equity risk premium indicator has again reached a historically high level, indicating that European equity valuations are deeply depressed against European bonds. We advise getting shorter on bonds and staying nicely long in equities," SG said in a note.