European stocks drop on oil, earnings fears

European stocks closed over one per cent lower yesterday, losing nearly three per cent on the week, after oil hit a record above $78 a barrel and investors worried about the earnings season given some early disappointments.

Swedish telecoms equipment group Ericsson shed three per cent after Samsung Electronics reported an 11 per cent drop in quarterly profit, while Philips Electronics fell ahead of results on Monday.

The pan-European FTSEurofirst 300 index of leading shares closed 1.2 per cent down at 1,277.5 points, a two-week low. The three per cent drop was the second worst weekly performance this year after a four per cent fall in mid-May.

The benchmark is nine per cent below a near five-year high hit on May 11.

An initial correction in May was sparked by fears of inflation and rising borrowing costs which have morphed into earnings worries. Record oil and security concerns in Israel, Iran and North Korea have added to the mix.

"Markets seem somewhat caught up over the high price of oil and possibility of escalating conflict in the Middle East," said Paul Webb, trader at CMC Markets.

"Despite the speculation that US rates may now peak sooner than had been expected previously, the prospect of lower returns on cash is doing little to buoy equities."

Around Europe, Germany's DAX fell 1.9 per cent, France's CAC 40 slipped 1.5 per cent and Britain's FTSE 100 shed one per cent.

Yesterday's losses were extended late in the session as the Dow Jones industrial average fell one per cent on fresh earnings worries. General Electric Co., a bellwether for the US economy, reported higher second-quarter earnings, but its shares dropped to their lowest level in nearly two years after GE's third-quarter outlook disappointed investors.

Bourses were also tempered early by the Bank of Japan's decision to raise interest rates for the first time in six years. It increased its key rate to 0.25 per cent from zero as it joined central banks in Europe and the United States in tightening monetary policy.

Markets will be hoping for clues next week on how close the US Federal Reserve is to ending its two-year hiking campaign.

Fed Chairman Ben Bernanke delivers his semi-annual address to Congress on Wednesday, the same day that US consumer price figures for June are released.

Auto stocks suffered after figures showed European new car registrations dropped in June, with BMW off 1.7 per cent.

But the world second biggest truck maker Volvo saw its A- and B-shares gain 3.8 per cent and two per cent.

A Swedish newspaper said sources speculated Cevian Capital was buying up stock as the spread between the two types of shares diminishes. Cevian declined to comment on the report.

NYMEX crude oil futures hit a peak of $78.40 a barrel on security and supply concerns across the globe, along with dwindling US stockpiles. The move failed to inspire oil stocks though, with BP up just 0.3 per cent and others down.