European stocks hit six-week closing low

European stocks slipped to their lowest close in six weeks yesterday, weighed by heavy losses in oil stocks, which tracked a sharp fall in the price of crude.

The pan-European FTSEurofirst 300 ended 1.3 per cent lower at 1,311.79 points, a little up from the session's lows following a better-than-expected reading on the US ISM Non-Manufacturing index.

Oil and gas stocks took the most points off the index, as BP slid 3.9 per cent, Royal Dutch Shell lost 2.9 per cent and Total fell 3.8 per cent.

"The way oil and gas move is literally the way the market moves, because they are so heavily weighted," strategist Elin Ottosson at Cazenove said.

Oil prices were down more than $1.30 a barrel, adding to a $3 fall on Tuesday after Federal Reserve Chairman Ben Bernanke remarked that the weak dollar was adding to price pressures. The comments disappointed those hoping for further rate cuts in the near future and strengthened the dollar.

Andreas Huerkamp, strategist at Commerzbank in Frankfurt, said he did not expect the Federal Reserve to cut rates below two per cent in the coming quarters.

Drawing a contrast to the early 1990s, Mr Huerkamp said that this time round, the yield on US 10-year Treasuries did not leave much room for falling long-term bond yields, a factor that is supportive of equities.

"However, inflation may become a positive catalyst as from 1991 to 1993. US inflation fell 250 basis points from 5.7 per cent to 3.2 per cent.

"If oil and food prices started to stagnate, then headline inflation might fall back to levels of core inflation (two per cent in the US, 1.5 per cent in Germany)," Mr Huerkamp added.

Miners also declined, tracking base metal prices, which suffered from the strength in the US dollar and from growing concerns over global economic growth and demand from China and the US.

Rio Tinto shed two per cent, BHP Billiton ended the day 1.6 per cent lower, and Vedanta Resources lost 4.2 per cent.

The fall in oil prices boosted airline stocks, however. Deutsche Lufthansa gained 3.4 per cent, British Airways jumped 5.9 per cent, and Air France-KLM soared six per cent.

The three airlines were the top gainers on Germany's DAX, Britain's FTSE 100 and France's CAC, which were between 0.8 and 1.5 per cent lower.

Writedown woes weighed on sentiment in banks for the better part of the day, and shares in Deutsche Bank closed 0.97 per cent lower, Societe Generale fell 1.6 per cent, and Credit Agricole lost 1.13 per cent.

An upgrade of shares in Lehman Brothers at Merrill Lynch to "buy", however, helped bring about a partial recovery, with the DJStoxx 600 European banks index ending 0.8 per cent lower after having fallen more than two per cent earlier in the session.

Merrill Lynch said in a note that the recent share correction was overdone, given Lehman's access to the Fed primary dealer facility and liquidity.

Although the broker believed a capital hike at Lehman was likely, it added that this was already reflected in the share price.

Among losers, Bouygues lost 6.7 per cent after Exane BNP Paribas lowered its recommendation on the French conglomerate to "neutral" from "outperform" following an in-line earnings report.