European shares were set to end the week on a mixed note as gains in Italian bank Capitalia lifted Milan yesterday and helped offset a slide in Munich Re and signs suggesting the war in Iraq is denting company profits.
Hotel stocks such as Accor fell after US peer Hilton Hotels halved its profit forecast, and auto stocks such as Volkswagen dipped amid evidence of faltering demand for big-ticket goods.
Trading volumes were well below average. But if last week was the week when hopes for a short war peaked, then this was the week when the reality of a possibly protracted affair hit investors, as US-led forces in Iraq met stiff military resistance and a mixed response from local people.
"We're not trying to call things in the short term because we don't have any clear idea of how the conflict will pan out," said Kevin Gardiner, European equities strategist at CSFB.
By 1648 GMT, with only Frankfurt still trading officially, the FTSE Eurotop 300 index of pan-European blue chips was down 0.36 per cent at 771 points and the DJ Euro Stoxx 50 index was 0.2 per cent higher at 2,137 points.
Share prices fell in Frankfurt, London, and the Nordic region, but were flat or slightly higher elsewhere.
The Eurotop 300 benchmark index is 5.1 per cent down on the week and has retraced about a third of its nine-day 19 per cent gains to March 21, as hopes for a short war have faded.
The US has ordered 100,000 more troops to the Gulf and US forces are amassing near Kerbala, about 80 km south of Baghdad, preparing for what could be a key battle with a full Iraqi brigade of some 6,000 men, en route to the capital.
Some strategists said they wanted the fog of war to clear before making any recommendations but added that the potential for a sharp hike in shares in the event of a big breakthrough by the US-led forces would also place a cap on sellers.
"There's value in the market and when the conflict eventually ends, which we think will be within the next quarter, the market will probably rally as uncertainty is reduced and some of the economic indicators bounce too, but we're not trying to fine tune it any more than that," said CSFB's Gardiner.
Other strategists were less favourably inclined. Citing the potential for company earnings growth to slow again in 2004, regardless of the war, HSBC cut its weighting in global equities to "underweight" from "neutral".
Munich Re ditched 10.7 per cent, ensuring Germany's DAX index underperformed other national benchmarks, after the world's biggest reinsurer was hit by several broker downgrades, amid jitters that a planned bond issue will not be enough to shore up its stretched capital base.
Traders added that information from Munich Re's conference call late Thursday - after the group had reported worse-than-expected 2002 results - had shown the stock to be overvalued compared with top rival Swiss Re, which saw its shares rise 3.7 per cent.
Milan's Mib-30 outperformed with a 0.6 per cent rise, helped by gains in Capitalia after the loss-making Italian bank forecast a 2003 net profit.
Consumer cyclicals sank as hotel stocks such as France's Accor and Spain's NH Hoteles dropped around 3.5 per cent each after US peer Hilton Hotels halved its first-quarter profit forecast, saying the war had hurt business.
Airlines including British Airways also slipped after Australia's Qantas Airways joined the ranks of network carriers slashing flights amid growing fears that a protracted war in Iraq will crimp air travel.
Aerospace group EADS extended its losses from Thursday, sinking another 5.3 per cent as investors again fretted about a possible loss of orders for its Airbus aircraft.
Some auto stocks like Volkswagen were hit by concerns demand will be dented by the war, after a study by J.D. Power and Associates revealed new US car and light truck sales slid eight per cent in the first four days of the conflict.
On Wall Street, both the Dow Jones industrial average and the tech-laden Nasdaq Composite were flat.
Earlier, a final University of Michigan US consumer sentiment index reading of 77.6 was a bit stronger than expected but was still the lowest figure in almost a decade and highlighted the fragility of the world's biggest economy.
"The directional drift in consumer confidence is down and that is the real worry for US monetary authorities as the war drags out," said David Brown, an economist at Bear Stearns.