European shares hit 2-year closing low as banks fall

LONDON Tue Sep 6, 2011 4:20pm EDT

A trader reacts at his desk in front of the DAX board at the Frankfurt stock exchange September 5, 2011. REUTERS/Alex Domanski

A trader reacts at his desk in front of the DAX board at the Frankfurt stock exchange September 5, 2011.

Credit: Reuters/Alex Domanski

LONDON (Reuters) - European shares hit their lowest close in more than two years Tuesday, on worries that political discord was exacerbating the euro zone debt crisis and that major economies were headed for recession.

Banks exposed to the euro zone's peripheral countries were among the worst performers. The STOXX Europe 600 Banking Index .SX7P fell 2.1 percent to a 29-month low, with French banks BNP Paribas (BNPP.PA) and Societe Generale (SOGN.PA) down 5.2 and 6.5 percent.

Among individual stocks, German drugmaker Bayer (BAYGn.DE) fell 7.5 percent after U.S. drug regulators questioned the effectiveness of an experimental stroke preventer from the German drugmaker and Johnson & Johnson (JNJ.N).

The pan-European FTSEurofirst 300 .FTEU3 index of top shares fell 0.7 percent to 903.87 points, its lowest close since July 2009. Volumes were high, 11 percent above the index's 90-day average.

The index is down more than 19 percent in 2011, hit by the euro zone and U.S. debt problems and data raising fears of recession across the Atlantic, such as Friday's disappointing U.S. non-farm payrolls report.

"We're still in the eye of the storm," said Richard Batty, strategist at Standard Life Investments, part of the Standard Life Group, which administers 196.8 billion pounds ($314 billion) of assets.

"Investors are concerned about the tier-two economies, such as Italy, and its ability to get its budget through parliament and come up with a fiscal consolidation plan to make its debt sustainable."

However, Switzerland's share benchmark .SSMI climbed 4.4 percent after the country's central bank set an exchange rate cap on its soaring franc to stave off recession.

The Swiss franc plunged against the euro. A range of Swiss stocks topped the gainers' list. Drugmaker Novartis (NOVN.VX) rose 6.8 percent, and Zurich Financial Services (ZURN.VX) rose 3.9 percent.

Europe's drive to halt its crippling two-year debt crisis looked increasingly at risk Tuesday amid doubts about the will in Italy and Greece to push through austerity measures demanded by their partners, and hardening opposition to further aid in the bloc's paymaster Germany.

Euro zone debt concerns grew after news that the German Finance Minister Wolfgang Schaeuble had said Greece might not receive another aid tranche if a report from the troika of the International Monetary Fund, European Central Bank and European Commission was not positive.

Across Europe, Italy's FTMIB .FTMIB fell 2 percent, Portugal's PSI .PSI20 fell 2.3 percent and Germany's DAX .GDAXI and France's CAC40 .FCHI fell 1 and 1.1 percent.

Britain's FTSE .FTSE bucked the trend, rising 1.1 percent, as bargain hunters drove up commodities shares.

Although stocks now look cheap, strategists said investors were now more risk-averse.

"There is value in equities, but in the short term it's hard to see how that value gets crystallized," Batty said.

"There are no signs of quantitative easing. We're not really getting the growth-oriented policies coming through, so risk assets do poorly. The market is trying to find a level at which it can force the policymakers' hands."

WALL STREET FALLS

Wall Street, trading for the first time since the extended weekend, was lower around the time European bourses were closing. The S&P 500 .SPX was down 1.9 percent, despite relatively upbeat economic data.

The dominant U.S. services sector picked up steam unexpectedly last month, snapping a three-month streak of slower growth, though the pace of hiring slowed slightly, underscoring broader job market concerns.

"Normally such a number would have sent U.S. shares higher, but such is the uncertainty in the market that bounces found ready sellers," said Michael Hewson, market analyst at CMC Markets.

Some traders also expressed skepticism about the Swiss central bank move.

"The immediate question one may ask is 'Do the SNB really want to hold a currency (euro) that by the day seems to be crumbling, with European leaders in disarray and with investors still awaiting to see a credible solution to the sovereign debt crisis," said Neil Looker, chief forex dealer, at City Index.

(Editing by Will Waterman)

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