European shares fell 1.04 per cent yesterday, retreating from 40-month highs as Hurricane Rita intensified off the southeastern United States, forcing oil prices upwards and hitting US stocks.
A growing fear of more US interest rate rises added to nerves as crude prices surged to around $68 a barrel before slipping back somewhat when inventory data showed gasoline stocks had unexpectedly risen.
The higher cost of the chemical industry's most crucial raw material knocked the DJ Stoxx chemicals sector index 1.6 per cent as profit margins were threatened.
"European chemical stocks are moving closer to fair values at present, and a further increase in the oil price could see them fully valued at current levels," said BayernLB analyst Michael Butscher, adding that demand for chemicals remained good.
Shares in industry bellwether BASF were down 2.3 per cent at €59, Bayer was down 2.4 per cent at €29.85, Ciba was down two per cent, Clariant fell 1.9 per cent, Syngenta dropped one per cent and Akzo Nobel lost 1.6 per cent.
The pan-European FTSEurofirst 300 index closed 1.04 per cent lower at 1,205.39 points after ending at a 40-month high in the previous session. The index had risen about 1.5 per cent in the past five sessions.
Germany's DAX was the heaviest hit, dropping 1.77 per cent to 4,875.2 points. Paris's CAC 40 index lost 1.41 per cent to 4,468.1 points.
The higher oil price made the DJ Stoxx oil and gas sector index the only gainer on the day, up a marginal 0.02 per cent with BP adding 0.3 per cent. A firming gold price helped mining stocks. Anglo American and Rio Tinto gained 0.25 per cent and 0.33 per cent respectively, supported by gold, which, although off 18-month highs touched on Tuesday, was seen strengthening as a safe haven investment.
"It is an oil day. Oil is over $68 now and that, combined with a very hawkish statement from the Fed, is weighing on the market," said Tim Ghriskey, chief investment officer of Solaris Asset Management.
Rita, strengthening over the Gulf of Mexico and threatening oil production, knocked Wall Street after it fell in the previous session when the Federal Reserve raised rates by 25 basis points to 3.75 per cent and signalled more increases.
The central bank said Hurricane Katrina, which devastated a huge swathe of the southern United States only two weeks ago, would provide only a temporary setback to the broad economy and said it remained vigilant about the risks of inflation.
Shares in Deutsche Bank fell 2.6 per cent after the bank's CEO ruled out participating in German banking consolidation. The stock was also weighed by JP Morgan cutting its rating to 'neutral' from 'underweight'.
Standout gainers included Dexia, up 2.8 per cent despite comments from the Belgian-French banking group that it had not been in contact with rival Fortis about closer cooperation that could lead to a merger, following a local newspaper report.
Inditex rose 4.9 per cent after the Spanish fashion retailer reported a forecast-beating 29 per cent rise in first half profit and gave a robust full-year outlook.