Euro sharply lower

Mon, 12 May 2008

European stocks closed sharply lower on Friday, hit by another record spike in oil prices and heavy losses on Wall Street following news of large write-downs at giant US insurer AIG.

Dealers said American International Group's first quarter net loss of $7.81-billion and a cash call for $12.5-billion reminded investors there could still be unpleasant surprises in the fallout from the US sub-prime home loan crisis.

Markets have been steadier of late on the view that the worst of the crisis was over but that optimism was severely tested by the AIG lead.

At the same time, rocketing oil prices helped push down Asian shares earlier on Friday, setting up Europe for a weaker start where investors saw crude jump first through $125 a barrel and then $126.

The growing concern is that such prices will stoke inflation and so boost the case for higher interest rates at a time when investors are hoping for central banks to lower lending costs to keep the global economy on track.

In London, the FTSE 100 index closed down 1.05 percent to 6204.70 points. In Paris, the Cac 40 tumbled 1.88 percent to 4960.56 points and in Frankfurt the Dax shed 0.97 percent to 7003.17 points.

The Euro Stoxx 50 index of leading eurozone shares was down 1.41 percent.

The euro was at 1.5451 dollars.

In Asia, Japan lost 2.06 percent while Hong Kong shed one percent. Sydney bucked the trend, putting on nearly one percent as its miners led the way.

On Wall Street, shares were down sharply, with sentiment hit by concerns over oil and AIG's results.

The Dow Jones Industrial Average was down 0.91 percent at around 4.00pm GMT.

"AIG's news has prompted downgrades from the credit rating agencies and has renewed concerns about the longevity of the credit market mess," said Briefing.com analyst Patrick O'Hare.

Analyst John Hall at Wachovia said "it's hard to look on AIG's first-quarter results favorably."

"The conditions that have led to substantial realized and unrealized losses have not dissipated and don't appear on track to do so soon, in our view," Hall added.

In London, the banks were hit badly by the AIG lead while the miners fell on profit-taking after recent sharp gains, dealers said.

Royal Bank of Scotland lost 2.87 percent to 347 pence, Barclays was down 2.48 percent to 451.50 pence and Lloyds TSB fell 2.42 percent to 433 pence.

In Paris, dealers said it was significant that the market had failed to hold at support of 5000 points and noted that the Cac 40 had been down 2.5 percent at one stage.

"There were three things that the market did not like — a second losing day in Asia, AIG's results and continued higher oil prices," one dealer said.

"Taken together, that is troubling. The market had risen so it would be natural for it to correct a bit but this oil price which just keeps on going up, that is worrying," he added.

In the financials, insurer Axa lost 1.87 percent to 23.57 euros and BNP Paribas was down 2.10 percent to 67.44 euros

Air France-KLM shed 3.10 percent at 19.67 euros, like all the airlines hit by concerns over rising fuel costs.

In Frankfurt, sentiment was similarly hit by the rise in oil and the AIG lead, with Allianz down 1.01 percent to 129.05 euros after its results and those of unit Dresdner Bank which were badly hit by the credit crisis.

Elsewhere in Europe, the Bel-20 in Belgium was down 1.19 percent, Spain's Ibex-35 lost 0.92 percent, Italy's Mib-30 fell 1.07 percent, the AEX in Holland dropped 0.87 percent and the Swiss Market Index shed 1.35 percent.