European shares stagger as economic, FX fears bite

European shares closed lower yesterday as foreign exchange worries and weak US economic data made investors pessimistic about corporate profits, with shares in car and drug makers hit the hardest.

Takeover speculation lifted selected stocks such as Italian insurer Generali and French building materials group Saint-Gobain, while firmer base metals prices bolstered BHP Billiton and other mining stocks.

But this was not enough to turn around sentiment, bedevilled by a slide in the dollar to 14-year troughs against the sterling and 20-month lows versus the euro.

The FTSEurofirst 300 index shed 0.8 per cent to close at 1,432.43 points in volatile trade, looking set to end the week lower for the third time in a row and retreating further from a recent five-and-a-half year peak of 1,476.47.

Markets took a turn for the worse shortly after an economic report showed an unexpected contraction in business activity in the US Midwest in November, the first one in over three-and-a-half years as new orders and hiring slowed.

This and a higher-than-expected rise in new jobless claims stirred up worries about the scope of a US economic slowdown.

A third set of data showing tame US core consumer prices comforted investors in the belief that the Federal Reserve would keep interest rates on hold or cut them in the coming months.

This, in turn, pushed the dollar down further as the prospect of a narrowing differential between US and European borrowing costs made the dollar less attractive.

"The double whammy for stocks is that not only will this data reignite fears of an impending recession, it will also add further momentum to the sell-off in the dollar, thus turning the screw on exporters to the US," said Martin Slaney, head of spread betting at GFT Global Markets in London.