Recession fear, SocGen dent European shares

European shares fell yesterday as fresh worries over the global economy hit commodity stocks and the fallout at fraud-hit French bank Société Générale weighed on financials.

Société Générale, which last week said it lost $7 billion due to a fraud by a single trader, fell by as much as 9.6 per cent after Citigroup downgraded it to "sell" from "buy" and halved its price target for the bank.

SocGen shares ended the day down 3.3 per cent, which depressed shares in HSBC, Barclays and Banco Santander.

A drop in the price of crude oil and copper weighed on the likes of BP, Total and Rio Tinto as concern that Japan may be the next economy teetering on the brink of recession rekindled investor fears of a contraction in global demand for raw materials.

The FTSEurofirst 300 index of top European shares fell one per cent to 1,317.15, points, bringing losses for January to 12.6 per cent, well on track for the worst month in more than five years.

"Basically the story has been the same for quite a while now, since the beginning of the year, of weak economic figures and low visibility from companies," said Philippe Gijsels, senior equity strategist at Fortis Bank in Brussels.

"This means that the scenario we've put forward... remains in place, where we turn more negative on the markets, he said, adding: "It is clear that the US economy will go into at least a mild recession."

European banks have lost about 14 per cent so far this year, making them one of the worst performers as mounting losses from the US sub-prime lending crisis and now the fraud at SocGen batter the sector.

Citi said the fraud losses and fixed-income risk provisions had "severely impaired" SocGen's franchise and noted that a rights issue was set to come at a deep discount, diluting earnings.

Barclays shed one per cent, HSBC was down two per cent and UBS was down 1.5 per cent.

Commodity stocks also came under pressure, tracking falls in crude below $90 a barrel and copper futures.

Index heavyweights BP and Shell were down between 1.1 and 1.3 per cent, while miners Anglo American, Rio Tinto, Lonmin and Antofagasta all fell between 1.1 and 4.8.

Britain's FTSE 100 was down 1.4 per cent, Germany's DAX was flat and France's CAC was down 0.6 per cent.

Another batch of weak US housing data initially hurt US stocks but Wall Street shares eventually pared losses to show a modest rise, helped by positive earnings surprises from Corning , a maker of glass for flat-panel displays, and McDonalds.

Later in the week, the US Federal Reserve releases its decision on monetary policy, following its surprise 75-basis point cut last week, although the expectation of a half-point cut at this week's meeting has waned somewhat.

Among the few gainers was Belgian-Dutch financial group Fortis, which rose seven per cent after it gave an update to investors, who were fearing the worst on its subprime exposure.

It said on Sunday its 2007 profit could take a €1 billion ($1.47 billion) sub-prime-linked writedown. The stock had dropped sharply on Friday on market talk of a profit warning.