Banks, commodities drag European stocks lower

European shares closed lower yesterday in response to disappointing US economic data, with banking and commodity stocks weighing the most on the main index.

The pan-European FTSEurofirst 300 index of top shares closed down 1.3 per cent at 932.22 points, losing for the second day in a row after hitting its highest close in more than nine months on Friday.

"We have had a couple of macro figures which did not please the market. The US labour costs and productivity figures are worrying ... they simply mean that there are enormous constraints on the consumer who are supposed to bail us all out of this," said Heino Ruland, strategist at Ruland Research.

"Industry is just slashing costs all over the place ... it means final demand may not be strong enough," he said.

Banks took the most points off the index. French bank Natixis slumped 17.5 per cent after the firm's parent, BCPE bank, told French market regulator AMF it did not plan to delist the shares of Natixis.

HSBC, Lloyds Banking Group, Barclays and Deutsche Bank were down 2.1-7.1 per cent.

Across Europe, the FTSE 100 index was down 1.1 per cent; Germany's DAX was 2.4 per cent lower and France's CAC 40 fell 1.4 per cent.

Commodity stocks were lower as crude fell 2.1 per cent and copper slipped 0.8 per cent on demand concerns. Oil major BG Group lost 2.3 per cent, while Rio Tinto and BHP Billiton dropped 1.6 and 1.5 per cent, respectively.

Insurers were in the doldrums. Friends Provident retreated from earlier gains, down 2.7 per cent as it posted a 38 per cent drop in first-half underlying profit to 131 million pounds, below forecast.

The British insurer earlier rose after agreeing a 1.86 billion pound ($3.07 billion) takeover by Resolution.

Chemicals groups were also lower, with Bayer slipping four per cent as the German chemical and drug company denied market talk that the company was looking to raise more capital.

"We need a pullback to shake the tree to see if the rally is really genuine," said David Buik, senior partner at BGC Partners, in London. "Remember, there's billions on the sidelines.

On the upside, electricity companies were among the top performers. Power generation firm International Power gained 7.2 per cent after it said its first-half operating profit beat market expectations, driven by currency effects and a strong performance in Asia and Australia.

Norwegian solar energy company Renewable Energy Corporation rose 5.3 per cent after it voiced optimism about its two biggest expansion projects.

Turning to macroeconomic data, US unit labour costs, a gauge of inflation and profit pressure closely watched by the Federal Reserve, fell 5.8 per cent, the biggest decline since the second quarter of 2000, while non-farm productivity in the second quarter rose at its fastest pace in six years.

Investors were also disappointed as inventories at US wholesalers plummeted 1.7 per cent in June, the tenth straight monthly drop, which drove stocks to their lowest level in more than two years, Commerce Department reported.