European shares dip on results, volume thin

European stocks fell yesterday from their strongest levels in two-and-a-half months struck in the previous session, as company earnings came in mixed, with HSBC beating estimates but rival bank ABN AMRO disappointing.

Bayer lost 1.4 per cent, hit by news that its new acquisition, German drugs firm Schering, has recalled an X-ray contrast agent and had some poor results from a key drug trial.

The pan-European FTSEurofirst 300 index fell 0.4 per cent to a provisional close of 1,339.0. The index rallied about 4 per cent last week to 1,344.1, its strongest finish since May 16 and its biggest weekly rise in percentage terms since March 2003.

Volumes were hit, with about 1.9 billion shares traded, the lowest since July 10. Trading volumes in the UK were also below than average daily volumes.

"There is some apprehension in the market with interest rate decisions round the corner, but we are getting into the holiday season and that's also keeping people away," said a trader.

Euro zone annual inflation held well above the European Central Bank's target in July while economic sentiment surprised on the upside, cementing expectations the bank will raise interest rates by 25 basis points to 3 per cent on Thursday.

Analysts polled by Reuters last week gave a median forecast of a 30 per cent chance the Bank of England will raise interest rates from the current 4.5 per cent when it meets on August 2 and 3.

Seven of the 46 economists in the poll forecast a 25 basis point rate increase.

Across Europe, London's FTSE 100 lost 0.8 per cent, while both Paris's CAC 40 and Frankfurt's DAX shed 0.4 per cent. Oil prices were higher at $73.6 a barrel.

Both the Dow Jones industrial average and the Nasdaq average were 0.2 per cent lower as the continued conflict in the Middle East and disappointing earnings reports hit stocks.

"Because we continue to see some downside risk to both economic and earnings growth we are not yet convinced that the equity market correction is over, despite last week's rally," said Bob Doll, chief investment officer at Merrill Lynch Investment Management.

"Having said that, however, it appears to us that the risk/reward profile for equities is still more favorable than it was a couple of months ago." Strategists said company earnings were mostly coming in ahead of market estimates and supported markets.

"Companies in the US, Europe and Japan seem to be surprising on the upside by a healthy margin, based on the second-quarter results so far," Lehman's equity strategists said in a note.

"We are bullish on equities and believe that current concerns about slowing earnings growth will be surmounted by the attractive valuations and cash yields available on equities, supporting equity market outperformance."

The European index is up 9 per cent from a seven-month intra-day low struck on June 14 on interest rate worries, but the index is still about 5 per cent below a near-five year high hit in early May.

Statoil fell 2 percent after the Norwegian oil and gas group said 2006 production might miss its target but reported a slightly above-forecast jump in operating profit.

Among gainers, Dutch mail and courier company TNT rose 3.5 per cent after it unveiled a stronger than expected operating profit and upgraded its full-year outlook.