European shares drop, US data flags slower growth

European shares broke five straight days of gains yesterday after soft US data flagged cracks in the US economy and a rise in short-term lending rates to six-year highs weighed on bank stocks.

HSBC, BNP Paribas, Royal Bank of Scotland and UniCredit were among the top negative weights on the European market after a series of downgrades to other components of the banking sector this week, while credit markets remained under stress.

US data showed job creation in the private sector rose at its slowest pace in six years in July, while a measure of pending home sales fell to its lowest since September 2001 and planned layoffs surged by 85 per cent in August because of the turmoil in the subprime mortgage market.

Financial futures show investors now expect two cuts to the federal funds rate this year.

This drove the pan-European FTSEurofirst 300 index of top European shares down 1.7 per cent to end at 1,522.63 points, off from the high for the day at 1,549.62 points.

"What's really knocked the market this afternoon is this weak data out of the US," said CMC markets analyst David Jones.

The index is still up nearly three per cent so far this year, having risen for eight out of the past 10 trading session, but is down almost seven per cent from the 2007 highs in mid-July.

"It's had a good run over the last few days and it's not surprising for it to hit some profit-taking today but overall, they're still quite positively poised, these European markets. A lot of people seem to be treating today as a buying opportunity," CMC's Mr Jones said. Adding to the pressure on European shares was a 20-basis point surge in the overnight euro LIBOR fixing rate, which hit 4.685 per cent, its highest level since late 2001, showing how illiquid the credit markets are.

The European Central Bank is expected to leave eurozone interest rates unchanged at 4.0 per cent today. Investors will be eager to hear ECB president Jean Claude Trichet's comments on the outlook for monetary policy following the upheaval in financial markets.

HSBC shares fell 1.8 per cent, making them the biggest weighted drag on the FTSEurofirst 300, while Unicredit shares were off 3.7 per cent.

Shares in RBS fell 2.8 per cent, while Spain's Santander shares were down 2.7 per cent and Fortis shares were down 1.8 per cent following a report in the Spanish media that the three banks bidding jointly for ABN Amro saw speculation it may lower its bid as "very premature".

On the downside, PSA Peugeot Citroen shed nearly four per cent, adding to the previous session's 3.6 per cent fall after the French car maker unveiled an ambitious recovery plan that disappointed investors.

Mining stocks were among the lone gainers on Wednesday after a number of broker upgrades. Vedanta Resources rose 3.1 per cent after Merrill Lynch added the stock to its "Europe 1" list, while platinum miner Lonmin rose 0.3 per cent.

Around Europe, both Germany's DAX index and UK's FTSE 100 index were down 0.6 per cent, while France's CAC 40 was down 0.9 per cent.

"It looks like a pause ahead of the ECB tomorrow. It's a big decision given the current context and it's not excluded that the bank will hike its rate. That might be what investors are afraid of today," said Jean-Francois Virolle, chief strategist at Global Equities, in Paris.