European stocks dropped yesterday, snapping a three-day winning run as British lender Northern Rock became the latest casualty of a global financial crisis, hitting shares of other banks.
Northern Rock sank 31.5 per cent after issuing a profit warning and tapping the Bank of England for emergency funds. It was the stock's biggest single day fall since entering the FTSE 100 index in October 1997, according to Reuters data.
The news sent shock waves through the European financial sector and put pressure on the shares of major US investment banks such as Lehman Brothers.
Among the worst hit, HBOS dropped 3.6 per cent, Barclays shed 3.1 per cent, Societe Generale dipped 2.2 per cent, and Anglo Irish Bank slid 5.3 per cent.
The pan-European FTSEurofirst 300 index closed 1.1 per cent lower, at 1,507.22. It eked out a gain of 0.8 per cent on the week.
Franz Wenzel, strategist at AXA Investment Managers, in Paris, said financial institutions are feeling the pinch from the crisis in the US subprime mortgage market, not only by direct exposure to losses in the risky market, but also from the overall tightening of credit conditions.
"Investors should brace for at least a couple of weeks of a roller-coaster," he said.
Over the past two months, equity markets worldwide have been suffering from fears that a debacle in the risky US subprime mortgage market could hit financial institutions' profits and dampen economic growth.
The FTSEurofirst 300 index is up 1.6 per cent so far this year, but down 7.8 per cent from a multi-year high struck in mid-July.
Investors are waiting for next week's interest rate decision by the US Federal Reserve, which is expected to slash its benchmark rate. Next week's spotlight will also be on third-quarter results from a number of US investment banks and the market will look for clues on the extent of the damage from the subprime market crisis and the credit crunch.
Merrill Lynch & Co said yesterday it has adjusted valuations of some of its credit exposures in the third quarter, citing continued challenging market conditions.
"More than the Fed decision on rates and the earnings figures from the banks, it's what they will say about the outlook that will be the focus," Wenzel said. Around Europe, UK's FTSE 100 index dropped 1.2 per cent, while both Germany's DAX index and France's CAC 40 shed 0.5 per cent.
The real estate sector, set to suffer from weakness at mortgage lenders, also took a hit, with Barratt Developments down 4.7 per cent and Persimmon down 6.6 per cent. Spanish construction shares also fell sharply on fears that the credit crunch will hurt companies that are highly indebted.
FCC lost 4.8 per cent while Sacyr-Vallehermoso dropped 5.1 per cent.
On the upside, defensive utility stocks were among the few gainers, with Germany's E.ON up 0.8 per cent and Gaz de France, also helped by an upgrade from Credit Suisse, up 2.3 per cent.
France's Alstom rose 2.4 per cent on renewed speculation it could merge with state-controlled nuclear group Areva after Alstom's executive chairman confirmed the company was interested in a tie-up.