January 15, 2008 / 5:39 PM / 12 years ago

Europe shares hit 15-mth low as U.S. worries weigh

LONDON, Jan 15 (Reuters) - Banks led European shares to their lowest close in 15 months on Tuesday as Citigroup’s (C.N) record quarterly loss amplified concern over the probability of a U.S. recession and monthly retail sales staged a shock fall.

The broader European market witnessed its worst one-day decline since mid-August as shares in everything from financials to defensives took a beating and every major Western European index was in the red.

The FTSEurofirst 300 index .FTEU3 of top European shares ended down 2.57 percent at 1,395.39 points, its worst close since early October 2006.

The index has fallen by more than 7 percent so far this year, wiping out last year’s 1.6-percent gain which was the worst yearly performance since 2002.

Even perceived safe-havens for equity investors came under fire, with drugmakers, food producers and telecoms all losing on the day.

“There comes a point where even if you’re defensive, you will still be hurt. Also I think there is a general feeling, which is becoming increasingly apparent, that EPS growth expectations ... for 2008 are way too high,” said Arthur van Slooten, a strategist at Societe Generale, in Paris.

“If you’re looking to protect yourself from extreme volatility, large caps and the mega caps notably generally provide better protection. Obviously, the major banks are the odd man out currently,” he said.

Banks bore the brunt of the sell-off after Citigroup unveiled a record quarterly loss of $10 billion, stemming from its subprime-related investments, cut its dividend and slashed jobs. The company also said it was raising $14.5 billion in fresh capital.

In Europe, HSBC (HSBA.L) lost 4.7 percent, while Banco Santander (SAN.MC) fell 3.7 percent and Royal Bank of Scotland (RBS.L) shed 5.7 percent.

“EMOTIONAL” MARKETS

U.S. data earlier showed a surprise fall in monthly retail sales in December, which closed out the weakest year at the cash register since 2002 in the strongest signal yet that the world’s largest economy may be sliding into recession under the weight of the slump in the housing market and the credit crunch.

This pushed down U.S. stocks by 1.7 to 2.1 percent .DJI .SPX .IXIC and further undermined European equities, which saw their most volatile session in a month.

“Markets are in an emotional phase,” said Thierry Lacraz, strategist at Swiss private bank Pictet. “The main driver will be the results season, and in the short term the yearly results from the banks.”

“The U.S. dollar is not helping, hurting cyclicals and luxury goods. So banks and financials are completely oversold, cyclicals are starting to suffer and we hope that the next stage will not be selling in defensives.”

Swiss drugmaker Roche ROG.VX slipped 2.6 percent after sales of several drugs at majority-owned U.S. partner Genentech DNA.N, including blockbuster cancer treatment Avastin, missed forecasts.

Denmark’s Novo Nordisk (NOVOb.CO) fell 5.3 percent after it said that it was halting development of its AERx inhaled insulin product.

Other drugmakers fell, also hurt by a Morgan Stanley downgrade to the European pharmaceuticals sector. Novartis NOVN.VX fell 2.3 percent, Sanofi-Aventis (SASY.PA) slipped 2.9 percent and AstraZeneca (AZN.L) lost 3.5 percent.

Retailers, the worst hit sector this year, were pounded again as Britain’s largest retailer, Tesco (TSCO.L), lost 3.1 percent after the company missed sales forecasts.

Debenhams DEB.L dropped about 17 percent after the department stores group expected trading conditions to remain difficult even though it beat forecasts with a 2.2 percent rise in like-for-like sales over Christmas.

Also hurting equities was a weak reading of Germany’s ZEW investor sentiment index, which fell to -41.6 this month, the lowest since January 1993.

London's FTSE 100 .FTSE fell 3.1 percent, hit by a drop in heavyweight oil stocks BP (BP.L) and Shell (RDSa.L), which fell between 3 and 4 percent.

Paris's CAC-40 .FCHI lost 2.8 percent and Frankfurt's DAX .GDAXI fell 2.1 percent.

Embattled UK mortgage bank Northern Rock NRK.L fell 16 percent after shareholders voted to restrict the board’s ability to issue new shares and narrowly failed to approve a second key proposal to restrict asset sales.

Additional reporting by Anshuman Daga and Sitaraman Shankar; Editing by David Cowell

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