U.S. recession jitters drag European stocks lower
PARIS, Jan 9 (Reuters) - European equities dropped on Wednesday to their lowest close in 1-1/2 months as worries over the prospect of a U.S. recession rattled investors and retail shares sank after Mark and Spencer's (MKS.L) profit warning.
Oil major BP Plc (BP.L) sank 3.6 percent after analysts warned that fourth-quarter 2007 earnings may be lower than expected, but BP denied it had guided analysts lower.
The FTSEurofirst 300 .FTEU3 index of top European shares closed 1.2 percent lower at 1,449.06 points. The index has already lost 3.8 percent in 2008, retreating in four of the six first sessions of the year.
In a note to clients, Goldman Sachs said it expects the U.S. economy to dip into recession this year. Goldman said real gross domestic product would contract by 1 percent on an annualized basis in both the second and third quarters. For all of 2008, the investment bank said GDP would rise by 0.8 percent.
Shares of European retailers were among the hardest hit, with Marks & Spencer tumbling 19 percent after reporting its worst quarterly performance in two years and warning the pain for Britain's retailers could extend into 2009.
"The market is getting worried about all these profit downgrades coming through, particularly in the retail sector, and there are surely more of them in the pipeline for the first quarter," said Bert Jansen, an equity strategist at Exane BNP Paribas, in Paris.
"It will be a battle between the profit downgrades and the cuts in interest rates. I think that the rate cuts should prevail, but it will be a close call."
ROTATION AND INTEREST RATES
Other retailers got hammered, with Tesco (TSCO.L) down 5.3 percent and Carrefour (CARR.PA), the world's second-largest retailer, down 1.6 percent.
France's PPR (PRTP.PA), the owner of luxury Gucci Group and sportswear maker Puma (PUMG.DE), sank 5.3 percent even after Chief Executive Francois-Henri Pinault said the group expects much better 2007 results and further gains in 2008 despite a U.S. slowdown and downbeat comments from British chain stores.
On the upside, investors continued to snap up shares of companies seen better positioned to withstand economic downturn, such as Novartis (NOVN.VX), up 2.3 percent, GlaxoSmithKline (GSK.L), up 1.8 percent and E.ON EONG.DE, up 1.6 percent.
"There is clearly a rotation in favour of more defensive sectors. Pharmaceuticals, beverages, insurance, oil and gas are the kind of sectors to be overweight on," Jansen said.
Around Europe, Germany's DAX index .GDAXI ended down 0.9 percent, Britain's FTSE 100 index .FTSE down 1.3 percent and France's CAC 40 .FCHI down 1.1 percent.
Banking shares, beaten down during the past few months by fears over the troubled U.S. subprime mortgage market and tightening credit conditions, fell further on Wednesday.
Royal Bank of Scotland (RBS.L) shed 2.5 percent, Barclays (BARC.L) fell 3 percent and BBVA (BBVA.MC) dropped 1.3 percent.
On the macro front, investors are bracing for interest-rate decisions by both the European Central Bank and the Bank of England on Thursday.
"The Bank of England's rate decision should be a close shave but we expect the MPC to cut this week," David Brown, Bear Stearns' chief European economist, wrote in a note. "The ECB should keep rates on hold and the key to watch for will be how hawkish Trichet sounds in the subsequent ECB press conference."
The U.S. Federal Reserve's next rate decision is expected on Jan. 30.
According to a Reuters poll, the Federal Reserve will cut interest rates by at least a quarter point this month, with a growing number of Wall Street firms seeing a chance of an even bigger cut following Friday's dismal employment report. (Editing by Quentin Bryar)
