Tuesday, November 3, 2009

European Indexes Slide; Banks in Focus

zurich car insurance

European shares ended lower Tuesday, undercut by a rise in risk aversion ahead of key central bank meetings as well as concerns about the banking sector and a fall by auto makers after BMW reported a slide in third-quarter profit.

The pan-European Dow Jones Stoxx 600 index fell 1.2% to close at 234.90. Every sector ended in the red, while the index's gains for the year were pared to about 18.6%.

On a regional level, the U.K. FTSE 100 index lost 1.3% to close at 5037.21, the German DAX declined 1.4% to end at 5353.35 and the French CAC-40 index fell 1.5% to settle at 3,584.25.

"Effectively, markets are having a look at risk assets. The sectors that have done well since the rally started in March are being hit particularly badly" said Philip Shaw, strategist at Investec Securities.

Equity strategists at J.P. Morgan said that they're not expecting investors to take on more risk as the year-end approaches "especially because they harbor significant skepticism regarding the sustainability of the recovery, and these concerns are not going to get answered in a hurry."

"We remain constructive on medium-term equity drivers, and think this rotation will ultimately turn into a good buying opportunity. However, we do not expect to step back in this side of Christmas, looking for a range bound market," they said.

Banks have risen 43% year-to-date. On Tuesday the sector was grappling with news that Lloyds Banking Group, up 2.7% in London, will not participate in the U.K. government's asset-protection scheme. Instead it will raise $34 billion and pay a fee to the taxpayer for the implicit protection provided to date.

Royal Bank of Scotland, which fell 7% in London, will participate in the APS under revised terms, sell off assets and not pay a dividend for two years.

Results were also on the agenda, with UBS falling 5.8% in Zurich after it said that it lost 564 million Swiss francs ($552.9 million) during the third quarter as wealthy clients continued to pull assets out of the bank.

Stephen Taylor, strategist at Dolmen Stockbrokers noted that the relationship between the dollar, equities and commodities has been very strong and that dollar strength on Tuesday could be related to this week's U.S. Federal Reserve's interest-rate meeting. "I think there's a risk that tomorrow, given the very strong economic figures that we have seen lately out of the U.S., that the Fed are maybe a little bit hawkish and may change the language of their statement," he said.

Any change of wording from the U.S. Federal Reserve would follow Australia's rate hike on Tuesday and precede interest-rate announcements from the European Central Bank and the Bank of England due Thursday.

Other companies updating investors on Tuesday included Swiss Re, up 6.4% in Zurich. The firm swung to a 334 million Swiss-franc profit in the third quarter, helped by growing profits in property and casualty, a return to profit in life and health and fewer markets-related losses. Swiss Re had lost 304 million francs in the year-earlier period.

Elsewhere in the insurance sector, Aviva's Delta Lloyd unit started trading in Amsterdam on Tuesday, changing hands at €15.49 a share. The IPO, Western Europe's largest this year, was priced at €16 a share. Aviva shares fell 2.5% in London.

German car maker BMW declined 6.3% in Frankfurt. The firm's third-quarter net profit dropped 74% to €78 million ($115.2 million) from the same period a year ago and BMW said "it cannot be assumed that an enduring recovery has taken hold." Daimler, the maker of rival Mercedes, fell 4.4% in Frankfurt.