Banks lead Europe shares lower in choppy trade

FRANKFURT - European shares fell to a near four-year low in choppy trade early on Tuesday as financials, led by Royal Bank of Scotland and Deutsche Bank, tumbled on talk of bigger funding needs amid the swirling global credit crisis.

By (Reuters)

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Published: Tue 7 Oct 2008, 4:33 PM

Last updated: Sun 5 Apr 2015, 2:13 PM

At 0928 GMT, the FTSEurofirst 300 index of leading European shares was down 0.5 percent at 1,000.26 points, having rallied as much as 2.6 percent in early trading in a short-lived rebound to its record 7.8-percent-drop on Monday.

The benchmark then fell 0.9 percent to its lowest level since Oct. 27, 2004.

"You can't predict anything, everything is very uncertain, the credit markets are still very burdened," said Anthony Christofidis, analyst at ATE Securities in Athens.

Banks were the top weighted losers, chopping 7 points off the FTSEurofirst 300 index.

Royal Bank of Scotland (RBS) fell almost 30 percent and Barclays was down 9.3 percent as a source familiar with the talks said that the British government had held talks with major banks on Monday evening at which the possibility of an injection of public money was discussed.

The government said it would do whatever it takes to support the banking system and would not speculate on possible policy options.

Deutsche Bank shares fell 10.5 percent on market concern about a possible capital increase. Deutsche Bank declined comment and a financial source told Reuters such talk was complete nonsense.

Financials remain under strain despite unprecedented measures taken by governments and central banks in recent days, weeks and months to support the ailing sector.

"The market has been, so far, quite unimpressed and unconvinced by the governments' moves," UBS said in a European Economic Focus note.

"The end game of this financial crisis must include recapitalization, including nationalization," UBS said, adding: "governments need to do more and will be forced to do so."

Iceland's market authority, battling to stave off national bankruptcy after its banks took on massive debts in expanding overseas, on Tuesday took control of Landsbanki, the island's second largest bank by value.

Down Under

Earlier, Australia responded to the global financial crisis by cutting interest rates by 1 percentage point to 6.0 percent, the Australian central bank's biggest rate cut in 16 years and twice the size analysts had expected.

Stock markets across much of Asia and commodity prices rallied. Investor appetite grew for monetary policy makers elsewhere to follow suit.

"Markets are waiting for central banks to lower interest rates to revive the economy. That's the main issue," said Christofidis at ATE Securities.

Citing the banking sector woes, weakness in many asset prices, and wild gyrations in many financial markets, Citigrouyp said: "The justification for emergency easing may be in place."

U.S. Fed fund futures have priced in a probability of a 75 basis-point cut by the U.S. central bank this month. The Bank of England is expected to cut rates on Thursday and the European Central Bank last week flagged it too could lower its rates.

Federal Reserve Chairman Ben Bernanke is due to speak on the economic outlook and financial markets later in the day. Finance ministers and central bankers from G7 countries meet in Washington on Friday.

Economic growth, and hence corporate earnings growth, looked set to slow as a result of the financial crisis, strategists said.

Morgan Stanley cut its 2009 global economic growth forecast to 2.7 percent and forecast a European corporate earnings trough late next year, enbabling an equity bull market to take off at the earliest in summer 2009.

"Between now and then, companies need to preserve capital and make sure they stay in business. In this environment we prefer defensives over cyclicals," Morgan Stanley said.

Oil and gas stocks were Tuesday's top weighted gainers on the back of 2.5 percent recovery in crude oil prices.

French Total and Royal Dutch Shell rose 2.8 percent each and BP was up 1.3 percent.

Software maker SAP fell 9.8 percent after the company warned of slower third-quarter software sales growth, prompting several analysts to cut their price targets.

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