European shares down led by banks on weak US data

European stocks fell yesterday, led by banking, energy and mining shares, as weaker-than-expected US economic data cast doubts about a return to growth and a recovery in corporate earnings.

Among individual stocks, Nokia fell five per cent after a study showed the mobile phone maker's popularity among teenagers was fading and construction-to-telecoms firm Bouygues slumped 7.9 per cent after a 55-per cent profit fall and a 2009 sales forecast cut. The pan-European FTSEurofirst 300 index closed 2.0 per cent lower at 868.10 points.

The slide erased most of Monday's steep advance and left the European benchmark with a gain of 4.3 per cent so far this year and 34.5 per cent above the all-time low it set on March 9.

Credit Suisse downgraded equities to "benchmark" from "overweight", saying in a strategy note: "Risk appetite has returned to levels not observed since November 2007, and equity-only risk appetite has reached euphoric levels".

In many sectors, stocks have risen to reach valuation levels consistent with a return to long-term economic and earnings growth, a situation which the latest data suggests is not yet on the cards, Credit Suisse said.

Steffen Neumann, an equities strategist at German bank LBBW, said stock markets were correcting from Monday's upward surge, which he felt had been exaggerated.

Below-consensus US data was one trigger for Wednesday's sell-off.

The US Institute for Supply Management's non-manufacturing index for May and US new factory orders for April came in below market expectations, while a US private sector employment report showed more job losses than expected in May.

"The US data disappointed," Mr Neumann said. "The improvement in leading indicators recently led to hopes that the hard data would be better but it did not turn out that way."

ING said in a note on the US data that a V-shaped economic recovery were beginning to look slightly less likely than the growth graphs in the shape of an U or a W.

"An evaporation of the stock price fuelled confidence gains of recent months could accelerate any downward adjustment that may be building," ING said.

IG Index Chief Market Strategist David Jones saw scope for profit-taking.

"If the balance of consensus shifts towards the perception that all the low-hanging fruit left in the wake of the stock market lows earlier this year has already been picked, we may be in for a sell-off as traders cash in their stock holdings and book profits," Mr Jones said in a note.

Banks, which outperformed the broader market during the recent rally, took most points off the benchmark index yesterday.

Barclays fell 5.0 per cent, extending Tuesday's 13.5 per cent slide after Abu Dhabi sold an 11 per cent stake in the British bank, UBS closed down 4.2 per cent, and Deutsche Bank lost 3.9 per cent.

Referring to valuations for European banks, which rose 116 per cent on the DJ Stoxx sector index between March 9 and June 1, Credit Suisse said that "investors have to price in the most optimistic normalised earnings scenario in order to see further upside. We remain cautious".

Among the oil and gas stocks, which lost ground on the back on a three per cent drop in the price of crude oil, Repsol fell 3.3 per cent, Total shed 3.0 per cent, ENI lost 2.3 per cent and BP closed down 2.2 per cent.