European stocks reel on China rate rise

European shares closed sharply lower yesterday, with mining stocks hit hard as China's surprise interest rate rise sparked concerns about slowing demand from the world's fastest-growing major economy.

Hawkish comments from a European Central Bank official, mixed earnings updates from DaimlerChrysler, Siemens and Alcatel, and energy stocks under pressure from a fresh slide in oil prices also soured sentiment.

Nicholas Garganas, an ECB governing council member, said euro zone interest rates were significantly below their normal level, fuelling speculation of more interest rate rises.

Some investors used these negative factors as excuses to lock in profits after a raft of mostly solid corporate earnings and buzzing takeover activity propelled Europe's top indices to levels unseen in nearly five years.

The pan-European FTSEurofirst index of 300 leading shares shed 0.56 per cent to end at 1,383.2 points, having picked up from session lows after Federal Reserve Chairman Ben Bernanke said the US central bank may soon pause in its interest rate increases.

"We remain positive on equities but it might be time to take money off the table in the most straightforward (cyclical) sectors," said Patrik Schowitz, global equity strategist at HSBC in London.

"Apart from the China picture, we think the economic cycle is going to start turning down later this year. Indicators will come down, central banks will end their monetary tightening cycles at some point this year."

"There is clearly a change in the market's environment that is going to happen towards the middle of the year and given how strong the cyclicals and the basic resources have been, we think investors will start taking their profits there soon."

China's central bank took financial markets by surprise as it raised its benchmark one-year lending rate to 5.85 per cent from 5.58 per cent, its first rise in 18 months.

This prompted a sell-off in stocks such as miners which have hugely benefited from red-hot Chinese demand in past quarters.

Mining giants such as Anglo American and Rio Tinto fell three per cent each on the announcement, while a broker downgrade on BHP Billiton also weighed on the basic producers sector. BHP shares ended down 2.9 per cent.

It was a busy reporting day for corporate Europe. Investors were disappointed by Siemens's results, shrugging off forecast-beating earnings to focus on news that the German industrial conglomerate expected growth to slow, and a $1.86 billion acquisition, which some analysts deemed expensive.