Weak banks push European shares to one-month closing low

European shares hit a one-month closing low on Tuesday as disappointing results from Swiss lender UBS and a move by Britain's Royal Bank of Scotland to join a government scheme hurt financials.

The FTSEurofirst 300 index of top European shares ended 1.2 per cent down at 968.93 points, the lowest closing level since early October. The index, which slumped 45 per cent last year, is still up 16 per cent in 2009 and has surged 50 per cent since hitting a record low in early March.

Across Europe, Britain's FTSE 100 index, Germany's DAX and France's CAC 40 fell 1.3-1.5 per cent. The VDAX-NEW volatility index rose to a six-week high. The higher the index, which is based on sell and buy options on Frankfurt's top-30 stocks, the lower is the desire for risk.

Financials were among the biggest losers. The DJ STOXX European bank index, which has spiked 150 per cent since hitting a floor in March, was down three per cent after touching its lowest level since mid-August.

"People are worried about the banking sector once again because we have had a couple of European results that were somewhat worse than expected," said Luc Van Hecka, chief economist at KBC Securities.

"In this market, once you have had a run up of about 60 per cent, it's nothing unusual that you get some temporary corrections and it could be easily 10 to 15 per cent. But fundamentals are still such that this will not go too far."

UBS fell 5.8 per cent after higher-than-expected accounting charges pushed it into its fourth consecutive quarterly loss and disappointing net withdrawals of 36.6 billion Swiss francs ($36 billion) at its key wealth and asset management business.

A shake-up of British banks - Royal Bank of Scotland and Lloyds Banking Group - and the European Commission's estimates after results of stress tests in the banking sector showing losses could amount to €400 billion ($590.9 billion) in 2009-2010 raised questions about the sector.

RBS was down seven per cent after hitting a six month low earlier in the session. It said it would join the government's asset protection scheme (APS) which is designed to insure riskier loans and accept punitive disposals and caps on its activities.

Lloyds, however, gained 2.7 per cent on relief that a record 13.5 billion pound ($22 billion) rights issue would mean it can stay out of the government scheme.

Other banks were also down, with Standard Chartered, HSBC, Barclays, BNP Paribas, Société Générale, Credit Agricole and Bank of Ireland falling 1.8 to 11.8 per cent.

Commodity shares also fell in line with the broader market trend. Miner BHP Billiton, Anglo American, Xstrata and ENRC fell 1.2 to 2.6 per cent, while oil major BP, Royal Dutch Shell and Repsol were down 0.6 to 2.1 per cent.

But positive economic data limited losses. New orders received by US factories beat expectations to rise 0.9 per cent in September, while Redbook Research said US chain store sales rose 0.9 per cent last week.

Investors took comfort from news that Warren Buffett's Berkshire Hathaway Inc will pay $26 billion to buyout railroad Burlington Northern Santa Fe Corp in what the billionaire investor called a bet on the US economy.

"It is set to be a blockbuster week from here in as rate decisions and jobs reports are released," said David Jones, chief market strategist at IG Index.

"We could well see yet more volatility and aggressive price movements, but we could also see this week dictate not only short term direction, but the direction for the rest of the year," he added.

The US Federal Open Market Committee's two-day meeting on interest rate policy, starting late yesterday, is expected to leave rates close to zero.

Germany's BMW fell 6.3 per cent after it gave a tepid markets outlook after third-quarter earnings before interest and tax shrank 86 per cent.