European stocks hit by bomb plot

European shares ended weaker yesterday but above intra-day lows as analysts expected little lasting economic impact from news that British police foiled a suspected plot to blow up several aircraft.

Telecoms stocks were hit hard as Deutsche Telekom issued a profit warning. Its shares fell 7.5 per cent, while Vodafone lost 3.9 per cent and France Telecom shed two per cent.

The pan-European FTSEurofirst 300 index closed 0.8 per cent lower at 1,329.7, above an intra-day low of 1,316.3 when it was down nearly two per cent at a two-week low.

The index is four per cent higher so far this year but five per cent down from a near-five-year high in May.

"We have seen in each of the various either scares or terrorist events in the last three or four years (that) there has been a one-day move, and then generally the market has recovered," said Jeff Currington, European equities portfolio manager at Credit Suisse.

"It doesn't seem at the moment it should be any different." On July 7, last year, bombings on London's transport network at one point sent European shares down as much as four per cent, but markets then pared losses and ended down 1.8 per cent.

British police said yesterday they foiled a plot to blow up airplanes flying between Britain and the United States in what Washington said might have been an attempted al Qaeda strike.

Britain's FTSE 100 index fell 0.6 per cent, and sterling slipped against the dollar. UK government bonds ended lower, wiping out an early rally after news of the bomb plot.

France's CAC 40 declined one per cent. US oil prices slid two per cent to $74.7 a barrel. US shares were slightly up by the close of European markets. British Airways cancelled all domestic and European flights in and out of London's main Heathrow airport yesterday but said it would try to operate as many long-haul flights as possible.

Its shares slid five per cent, and Lufthansa ended down 3.3 per cent. Spain's Grupo Ferrovial, which recently agreed to buy Heathrow airport owner BAA, lost 1.5 per cent.

Analysts said news of the plot would have a short-term negative impact on airline stocks but they did not expect losses as severe as following the September 2001 attacks on the United States.

"BA looks more sensitive than the two low-fare carriers due to its higher profile name and route network across the North Atlantic. The airlines, however, are in much better shape than they were in 2001," said Panmure analyst Gert Zonneveld.

Economists expected no major impact on consumer spending. "Could the foiled plot to blow up transatlantic flights leaving the UK have any discernible economic impact? We believe the short answer is: probably not, at least not any lasting impact beyond the costs that tighter security measures may potentially impose," Holger Schmieding, an economist at Bank of America, said in a note.

"Consumers and business people are unlikely to change their travel and spending habits by enough to affect the macro data for long."

Across Europe, Germany's DAX fell 1.3 per cent, further hit by Deutsche Telekom's woes.

Late yesterday, Deutsche Telekom cut its sales and earnings forecasts for this year and the next, and its second-quarter core earnings also missed analysts' estimates.

JP Morgan downgraded its rating on Vodafone to "underweight" from "neutral" as it expects a cut in consensus estimates for the UK firm following Deutsche Telekom's warning.