Oil price hits energy stocks

European shares fell yesterday, ending a three-session winning streak, as a drop in oil and metals prices pounded commodity-related stocks, and new worries about economic growth and corporate earnings sapped sentiment.

PPR shares fell 3.2 per cent as analysts predicted disappointing quarterly sales at the French retailer. This and comments by the new chief of Deutsche Telekom that this year would be a difficult year fuelled concern that analysts' earnings forecasts for Corporate Europe may be too optimistic.

The pan-European FTSEuro-first index of 300 leading shares ended 0.5 per cent lower at 1,511.95 points.

The index turned negative after the publication of a weaker-than-expected New York-area manufacturing report, and doubled losses in the last 1-1/2 hour of trading as oil plunged three per cent to hit its lowest level since May 2005.

Oil dipped after Saudi Arabia's oil minister said OPEC production cuts were working well and there was no need for an emergency meeting of the producer group. The new fall, which brought to 15.6 per cent the oil drop since December 31, hit energy stocks, which amounted to a fifth of overall market losses.

Mining stocks were also big decliners, with Antofagasta, Anglo American and Rio Tinto down between 1.8 and 3.7 per cent as demand concerns tied to rising stockpiles pressured copper and aluminium prices.

The commodity-rich FTSE 100 index ended 0.8 per cent lower at 6,215.7 points in London, and France's CAC 40 lost 0.7 per cent to 5,591.54 points as Total shares lost 1.3 per cent. But the DAX, which has fewer components with direct exposure to commodity prices, shed only 0.2 per cent.

Investors turned their eyes to today's batch of US economic reports - producer prices, industrial production and the Federal Reserve's Beige Book - for clues on the Fed's next move as growth moderates and price pressures ease.

Data showing a sharper-than-expected manufacturing slowdown in New York state this month took investors by surprise, even though some took comfort in reassuring comments from International Monetary Fund Managing Director Rodrigo Rato.

Mr Rato said a soft landing of the US economy was more assured as lower energy prices supported employment growth and consumption. He also said the global economy was enjoying one of its most sustained periods of growth since World War Two.

But some investors feared economic growth will slow enough to erode corporate profits. In France for instance, PPR shares fell as analysts expected a slump in French household consumption to have pressured PPR's retail performance.

"Our valuation of PPR could be affected by changes in the outlook for consumption," said Christian Devismes, analyst at Natexis Bleichroeder, forecasting flat mass retail sales at PPR at constant exchange rates in the fourth quarter.

Still in the retail sector, Britain's Debenhams slid seven per cent after reporting a slip in UK retail sales and said it remained cautious about the rest of its financial year.

Tesco also fell one per cent despite better-than-expected Christmas sales. Britain's biggest retailer urged the Bank of England not to increase the cost of borrowing too much, as this would put consumers under pressure.

But some companies sounded a more positive tone. Safran jumped nearly five per cent after tipping growth in the year ahead, while Pernod Ricard rose 2.2 per cent after the world's second largest wine and spirits group issued one bonus share for each five shares held by investors.

Also on the upside, Nokia helped lead technology gains, adding 1.5 per cent after Goldman Sachs upgraded the world's biggest mobile phone maker to "buy" from "neutral".