European shares ended lower yesterday as investors booked profits on recent climbers such as Cable & Wireless after a sharp rise in US consumer prices fuelled speculation interest rates may rise sooner than expected.
Shares in the UK telecoms company and French heavy engineering firm Alstom fell about four per cent and six per cent respectively as brokers said the stocks looked fully valued after recent gains.
But heavily-weighted oil stocks including Shell and Total lent support as worries about supplies pushed oil prices within a whisker of 11-month highs.
Markets erased early gains after a report showed the consumer price index, the most widely used gauge of US inflation, rose 0.5 per cent in January. Stripping out volatile food and energy prices, the CPI gained 0.2 per cent.
Economists had expected overall CPI to rise 0.3 per cent and the core index to tick up a mild 0.1 per cent.
"The market's reaction has been immediate as investors feel the prospect of interest rate rises has got a little closer, even though the Fed mainly looks at core inflation numbers and we still remain at levels that are far from being worrying for the bank," said CIC Securities economist Valerie Plagnol.
A slim dividend increase weighed on Spain's leading mobile phone service provider Telefonica Moviles, while disappointing operating profit growth and the absence of explicit earnings guidance for 2004 hit cosmetics maker L'Oreal.
But strategists remained bullish over company profits after a week of pleasing numbers from the likes of Volkswagen, Diageo, Reuters, Royal Bank of Scotland or BHP Billiton, despite the headwind of a weaker dollar, which hurts the earnings of European companies.
Nigel Cobby, managing director of European equities at JP Morgan, said two thirds of the companies the bank covered that had already reported quarterly earnings had beaten its analyst forecasts.
The FTSE Eurotop 300 index of pan-European blue-chips ended 0.7 per cent weaker at 1,010.54 points, slightly below a fresh 19-month high of 1,017.37 points set earlier in the session. Meanwhile the narrower DJ Euro Stoxx 50 index shed one per cent to about 2,904.4 points.
The benchmark Eurotop 300 closed the week 1.7 per cent higher than it started it, bringing to 5.5 per cent its gains for the year so far and to 48.3 per cent its rebound since last March's six-year trough.
"We're very encouraged that the margin improvement has more than overwhelmed loss of competitiveness due to the currency issue, and I think companies are a bit more confident about the future," said Gary Dugan, strategist at JP Morgan Fleming Asset Management.
A rebound in the dollar from a record low against the euro this week and its positive impact on shares highlighted the potential upside from a more sustained recovery in the US currency.
"Any conviction that the dollar's fall from grace is going to start to abate would be very good news for the European equity market," Mr Dugan said.
The dollar surged against the yen yesterday, with some traders citing an Associated Press report that Japan had raised its terror alert to its highest level.
The US dollar also regained ground against the euro after the CPI headline number fuelled prospects of monetary policy tightening. Ultra-low interest rates dent the appeal of dollar deposits.
Stand-out movers included Dutch electronics giant Philips and chip making equipment producer ASML after a disappointing January order-to-shipment ratio in the North American semiconductor industry.
"The whole semiconductor sector is under pressure after a sell-off in the US, and Philips is falling in line with the sector," said asset manager Lex Werkheim at broker Eureffect, also citing disappointing quarterly results of US computer and printer maker Hewlett-Packard.
Meanwhile, military equipment maker BAE Systems shed five per cent to 180.33 pence. Dealers said investors were locking in profits after the shares advanced from 157p since the middle of last week.
In New York, the Dow Jones industrial average had shed 0.4 per cent to 10,624 and the tech-focused Nasdaq Composite Index was 0.6 per cent weaker at 2,034.