European shares closed slightly higher yesterday but suffered their worst weekly points drop since July 2002, as worries over inflation, rising global interest rates and falling commodity prices dogged equities.
After settlement, Europe's FTSEurofirst 300 index of top shares closed 1.3 points or 0.1 per cent up at 1,306.56, amid fresh takeover news around steel-maker Arcelor and bourses Deutsche Boerse and Euronext.
However, the benchmark fell 56 points or four per cent on the week, its biggest weekly percentage fall since March 2003. In the last eight sessions it has lost around seven per cent to trade at a more than three-month low.
The index had previously been around near five-year highs thanks to forecast-beating corporate profits and a rise in takeover activity.
Many believe the correction is healthy and will not lead to a sustained decline.
"You should now invest in stocks which have under-performed so far such as pharmaceuticals and telecoms," said Rolf Elgeti, strategist at ABN AMRO. "Shares are still an asset class you need to have."
However, some analysts are more worried. "We find sufficient similarities between the current economic and market conditions with those prevailing before the stock market crash of October 1987 to conclude that a similar outcome is not impossible in the months ahead," said David Woo at Barclays Capital.
Shares in Deutsche Boerse rose three per cent and Euronext gained over five per cent, after the German exchange gave a detailed proposal to merge with its Paris-based rival.
Euronext holds its annual general meeting on Tuesday with some investors seeing it as a deadline to wrap up merger talks with either the New York Stock Exchange or Deutsche Boerse.
Meanwhile Nasdaq raised its stake in the London Stock Exchange to 25.1 per cent, paying an average price of 1,235.5 pence a share. LSE shares rose 0.7 per cent.
In another takeover saga, shares in Arcelor shot up nine per cent after Mittal Steel raised its hostile bid to over €24 billion.
Mittal, the world's largest steel group by production volume, dropped seven per cent in Europe.
Commodity prices tumbled further as the weak dollar rose, with mining shares hit again while heavyweight oil stocks such as BP generally ticked up despite crude futures dropping around a dollar to $68.50.
Strong US consumer prices data on Wednesday was a trigger for the biggest one-day fall on European stocks since September 2002 as investor worried the Federal Reserve would have to continue hiking interest rates despite hopes of a pause next month.
Worries about dollar weakness contrasting with inflationary pressures have led some analysts to fear the worst.
"It seems like markets are continuing to oscillate between two concerns: that the economy is already starting to slow and that the economy is not slowing yet, but that inflation pressure will force the Fed to engineer a slowdown," Goldman Sachs strategists said in a note.
"Either way, the market is not yet persuaded that the long run for growth-sensitive assets remains in place."
In other corporate news, healthy earnings pushed BNP Paribas up four per cent, boosting other bank stocks, while British Airways soared nine per cent as its profit jumped and the carrier raised its revenue forecasts.
Several FTSEurofirst futures and options contracts expired in mid-morning, causing extra volatility for an already rattled market.