Sun, May 16, 2004 - Page 10 News List

European markets turn defensive, miners lose

REUTERS , LONDON

Miners led European shares lower on Friday on signs that China's voracious appetite for metals will slow, as record crude oil prices stoked concern over global recovery while helping oil groups flirt with this year's peaks.

The market's defensive trend continued as investors put money into utilities and healthcare firms such as Suez and GlaxoSmithKline to shield themselves from higher interest rates.

STRONG GRowTH

Surprisingly strong euro-zone economic growth in the first quarter, hitting its fastest pace in three years, failed to stop the DJ Euro Stoxx 50 index of blue chips slipping to its lowest point for the year.

"A confluence of events, namely cooling Chinese demand, high energy prices and the choke on US borrowing, are combining to threaten global economic demand," said Societe Generale's global strategy team.

A rise in US consumer prices in April fuelled worry that the Federal Reserve will start hiking rates in June.

The FTSE Eurotop 300 index of pan-European blue chips ended down 0.7 percent at 973.1 points, with nearly three issues falling for each one that rose, though volume was barely average.

For the week, the benchmark slipped 2.2 percent, and the shift into defensive sectors was expected to continue.

"Broadly speaking, we are moving from a reflationary environment to one with a double-edged sword that is positive with rising profits, versus the prospects of rising bond yields and interest rates," said Michael O'Sullivan of State Street Global Advisers.

"We have seen the biggest ever move in defensives in the States probably because that is where rates are going to rise next," O'Sullivan said.

"The next piece in the puzzle is we are beginning to see moves into European defensives that we have not seen in two years, and those moves are only picking up," he added.

MINERS MAULED

Societe Generale strategists said China's authorities were applying the brakes to capital expenditure, and a fall in a key shipping index suggested that Chinese imports of raw materials had peaked.

Chinese inflation hit its highest level in seven years, prompting concerns that more drastic action will be needed to cool the economy.

Mining stocks have rallied in recent months, fueled by red-hot demand in China for metals and steel to feed a construction boom as the economy rattles along.

The DJ Stoxx basic producer index fell 2.3 percent to this year's low as shares in mining firm Anglo-American fell 2.8 percent to ?10.78 to make it the biggest faller among Europe's 50 largest firms.

Elsewhere in the sector, Rio Tinto fell 3.6 percent to ?12.12. Steel group Thyssen Krupp shed 3 percent to 13.03 euros as it blamed rising raw material costs for missing market expectations for its second quarter pre-tax profit adjusted for disposal gains.

PETROLEUM

The oil stocks sector rose to just shy of this year's high as it rode crude oil prices that vaulted to a 21-year peak of US$41.45 a barrel -- an all-time high on New York's contract.

The gains were on fears that supplies, already stretched by world economic expansion, could be hit by an attack on Middle East oil facilities.

French oil group Total gained 0.7 percent to 158.9 euros, and Shell was up 0.7 percent at ?4.0375.

Conversely, the higher oil prices weighed again on airlines as more expensive fuel erodes profit margins.

British Airways shed 3.6 percent to ?2.4675 after cutting fares to more than 30 European destinations from London's Gatwick Airport by up to one-third, despite newly introduced surcharges to offset high oil prices.

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