European shares battered by global risk aversion

European stocks fell for a fourth consecutive day yesterday in their worst week in over three months as concern about the US sub-prime mortgage market sparked a flight from riskier assets around the globe.

The FTSEurofirst 300 index of top European shares ended down 0.5 per cent at 1,520.06 points.

Investor worries over the threat that a slowdown in the US housing market posed to the world's biggest economy were exacerbated this week by a series of warnings from some of Wall Street's bellwether companies including top mortgage lender Countrywide Finance.

As a result, the FTSEurofirst is now on track for its worst monthly slide since January 2003.

"You've got this flight away from anything (to do) with sub-prime bonds or indeed now the bonds that finance takeover bids," said NCB Stockbrokers investment strategist Bernard McAllinden, in Dublin.

"The negatives are people are looking at risk and they are looking at the risk that the housing market could push the US economy into some form of recession," he said.

The big swings on European bourses yesterday echoed sharp falls in the US due to fears of credit contagion from the sub-prime market. The top European percentage decliner was Belgian drug, chemical and plastics company Solvay, which slipped 5.4 per cent after posting a drop in second-quarter earnings.

The top gainer yesterday was German carmaker Volkswagen, which rose 4.3 per cent after posting upbeat first-half figures, and chipmaker Infineon, which gained after saying it was looking to cut its stake in loss-making memory-chip unit Qimonda.

Finnish mobile phone maker Nokia rose 3.3 per cent on positive market expectations for the company's second-quarter figures due on August 3, analysts said.

Analysts said the earnings season in Europe looked good so far but was being overshadowed by credit market fears sparked by trouble in the US high-risk sub prime market.

The iTraxx Crossover index, the most widely used gauge of European credit market sentiment, reached its widest level since May 2005.

"The fundamentals from the earnings season are still reasonably robust, and valuations in Europe are still attractive at 12 times 2008 earnings," said UBS strategist Nick Nelson.

"But there's lots of volatility, and people are essentially driven by concerns over credit markets."

European shares briefly pared losses earlier on market talk that private equity firm KKR had secured funding for its purchase of Alliance Boots.

But a source familiar with the situation said syndication of the £5.05 billion of senior bank debt backing the buyout of Alliance Boots remained on hold, after which European shares slipped again.

"A deteriorating credit market is driving a flight to quality. Stocks that offer high profitability and low leverage are finding support," ABN AMRO analysts said in a note.

The FTSEurofirst 300 index owes much of its two per cent rise so far this year to a rash of merger and acquisition activity, much of it by private equity through leveraged buyouts (LBOs).