Gloomy forecasts clip European stocks

European stocks fell yesterday, surrendering some of the past two days' strong gains, as a raft of disappointing results from bellwethers such as Unilever and Deutsche Bank revived earnings fears.

The insurance sector was particularly hard hit, with Swiss Re sinking 26 per cent after it wrote down six billion Swiss francs (€4 billion) in toxic assets and said Warren Buffett was investing three billion francs in the group.

A second Swiss insurer, Zurich Financial Services, dropped 4.7 per cent after posting a 23 per cent fall in operating profit, cutting its dividend and announcing more cost cuts.

Stocks slightly extended their losses yesterday after the European Central Bank held interest rates at two per cent, taking a widely-expected pause from rate cuts even though the eurozone economy continues to weaken.

Across Europe, the FTSE 100 index was down 0.8 per cent, Germany's DAX was down 1.1 per cent, and France's CAC 40 was 1.5 per cent lower.

Investors remained cautious ahead of the ECB President Jean-Claude Trichet's press conference. The market will be looking for signs of further steps the Central Bank may take to shore up the eurozone economy.

Earlier yesterday, the Bank of England cut interest rates by 50 basis points to a record low of one per cent, aiming to help the British economy out of recession by getting consumers and companies to spend again.

"The market is currently very volatile. People have been trying to figure out when the earnings recovery will start, and stock markets tend to rally roughly nine months before that materialises," said Arthur van Slooten, strategist at Société Générale in Paris.

"The earnings flow is strongly negative at the moment, but it is not deteriorating as fast as during previous months."

Consumer goods giant Unilever lost 6.8 per cent after it scrapped all its targets due to global economic uncertainty, despite beating forecasts with a 7.3 per cent rise in fourth-quarter underlying sales. Rival Nestlé fell 2.6 per cent.

Deutsche Bank shed 5.9 per cent after the German lender predicted a grim future for the global economy and its industry as the one-time engine of its business, debt trading, broke down and the bank swung to a loss in 2008.

Other banking stocks retreated yesterday, with UBS down 7.2 per cent, Credit Suisse down 6.8 per cent, and Credit Agricole down 5.2 per cent.

Royal Bank of Scotland and Lloyds were among the few banks bucking the trend, both up around five per cent.

"Whether financials are through the worst, we are yet to see. Once we see the meat of the U.S. stimulus package and the establishment of the bad bank, then we can start to crystallise ideas more firmly," said Philip Lawlor, strategist at Nomura.