European shares fall, snapping six-day rally

European shares closed lower yesterday, snapping a six-day rally, with an across-the-board decline as investors on both sides of the Atlantic took profits.

The pan-European FTSEurofirst 300 index of top shares fell 1.1 per cent to a provisional close of 737.22 points.

The index rose 2.7 per cent over the week, and is up 15 per cent from the lifetime low to which it sank on March 9. The DJ Eurostox Banking index is up 47 per cent from the March 9 low.

Britain's FTSE 100 share index closed 0.7 per cent lower yesterday as strength in Barclays and other banking stocks was outweighed by weakness across a wide range of sectors, hit by the grim economic backdrop.

The FTSE 100 index ended 26.35 points lower at 3,898.85, having closed 24.95 points, or 0.6 per cent, higher in the previous session.

It is down 12.1 per cent this year but has gained 12.7 per cent from the year's low point reached earlier in March, as hope that US plans to buy toxic assets from banks has settled frayed investor nerves.

"Stocks bounced from extremely over-sold positions but economic reality is starting to dawn and data is demonstrating the underlying weakness," said Philip Lawlor, chief portfolio strategist at Nomura.

"I would expect the market to tread water following the strong bounce for financials" said Gerhard Schwarz, head of global equity strategy at UniCredit, in Munich.

"We need other sectors to take the lead. We are taking a breather, ahead of the G20 meeting next week, and then it's the start of the Q1 reporting season."

Shares in Switzerland's UBS, the world's largest wealth manager in terms of assets, fell 7.3 per cent as rumours swirled of a profit warning and writedowns in the first quarter.

Most other banks fell. BNP Paribas, Banco Santander, Credit Suisse, and Societe Generale fell between 1.1 and 7 per cent.

However, Barclays soared 24 per cent after saying it does not need to raise any fresh capital after Britain's financial regulator subjected it to "a detailed stress test" and was satisfied the bank's balance sheet can withstand more pain.

Telecoms giant Vodafone fell 3.1 per cent after Bank of America cut its price target to 160 pence from 210.

Britain's economy slowed even more sharply than expected in the last three months of 2008 as construction output plunged, official data showed yesterday.

The Office for National Statistics said the economy shrank by 1.6 per cent in the fourth quarter, the sharpest decline since 1980. Analysts had expected an unchanged reading of -1.5 per cent.

The annual rate of decline was revised down to two per cent, the sharpest fall since 1991, and the data helped push the pound to a one-week low against the dollar. Banks were the main positive for the index, with Barclays leading the sector higher, vaulting 24 per cent.

It gained after it said it does not need to raise any fresh capital after Britain's financial regulator subjected it to "a detailed stress test" and was satisfied about the state of the bank's balance sheet.

Lloyds Banking Group added 10.3 per cent while HSBC gained 0.8 per cent.

But the gloom on the economy helped weigh down retailers with Tesco easing 4.1 per cent and Sainsbury losing 4.1 per cent.

Moves were relatively muted ahead of next week's Group of 20 meeting of government leaders in London, with investors watching to see if any measures are agreed to shore up the ailing global economy.

"We're in a period of contemplation at the moment... No one is expecting (anything) too radical from the G20 meeting next week but if there could be some sort of co-ordinated agreement, a linking of arms that would have to be seen as a result," Richard Hunter, strategist at Hargreaves Lansdown, said.

Mobile phones heavyweight Vodafone was a drag on the index, off 3.1 per cent as Bank of America-Merrill Lynch cut its target to 160 pence to reflect lower growth.

Heavyweight miners were also broadly weaker as metal prices eased back and broker comment had an impact.

Deutsche Bank cut its earnings estimates and targets for the sector as it sees no underlying recovery yet in the sector. It downgraded its stance on BHP Billiton and Kazakhmys, down 3.4 per cent and 4.6 per cent respectively.

Lonmin fell 4.3 per cent, while Eurasian Natural Resources, and Fresnilo lost 7.5 per cent and 2.1 per cent respectively.

Rio Tinto bucked the weak sector trend, adding 4 per cent after Liberum Capital said there is a high chance of success for BHP Billiton to bid for Rio after previous failed attempt.

Insurers were weak, reflecting some uncertainty over European Union plans to reform the sector to make it safer for policyholders.

Aviva, Prudential, and Standard Life, shed between 3.3 per cent and 5.8 per cent.

House prices in England and Wales fell 16.5 per cent on the year in February, the Land Registry said yesterday.