* Index down 1.8 percent, lowest close since March 17
* Focus on banks, high oil price, rising inflation
* Earnings estimates seen falling as economic growth slows
By Peter Starck
FRANKFURT, June 20 (Reuters) - European shares fell for the
third straight day on Friday, led by a slide of more than 5
percent in Dutch-Belgian financial group Fortis <FOR.AS>, with
the focus on the health of banks, high oil prices and rising
inflation.
The FTSEurofirst 300 index <> of top European shares
dropped 1.8 percent to 1,222.51 points, its lowest close since
March 17 and down 3.5 percent for the week.
The benchmark index climbed 15 percent between mid-March and
mid-May as investors cheered the U.S. Federal Reserve-sponsored
bail-out of U.S. investment bank Bear Stearns. Those gains have
now been wiped out.
Erste Bank attributed the downturn to high oil prices,
persistent uncertainty stemming from the financial crisis, the
strong euro and high inflation.
"Unless these essential parameters change, we expect a
continued weak stock market performance," Erste said in a note.
A month ago some bankers and analysts said the worst of the
financial crisis appeared to be over, but recent banking sector
developments have once more discouraged investors.
Friday's top victim was Fortis, down 5.1 percent, on worries
the group may need to raise more capital.
"The market is most worried about the solvency situation
of Fortis," Rabo Securities said in a note.
"We estimate that Fortis only has 2-4 percent cushion in its
insurance equity portfolio before it has to stop realising
equity capital gains. If stock markets decline further there is
the risk for negative equity impairments via the income
statement," Rabo Securities said.
British mortgage lender HBOS <HBOS.L> fell 4.9 percent and
Swiss UBS <UBSN.VX> lost 3.3 percent.
"UBS likely to have the greatest negative P&L (profit and
loss account) impact in the second quarter of 2008, reporting
another loss at group level," Lehman Brothers said in a note
assessing the need for further asset writedowns at European
investment banks.
The DJ Stoxx European bank index <.SX7P> fell 1.8 percent.
It has underperformed the broader market, declining almost 22
percent from its May peak.
"Worries about further write-offs as well as liquidity
problems in the financials sector contributed to this trend,"
Raiffeisen Bank said, adding that high raw material prices would
keep alive corporate earnings revision fears in other sectors.
EARNINGS DOWNGRADES
Citigroup said current consensus earnings estimates for
European companies suggested 3 percent growth in 2008. The
consensus has come down from 11 percent growth at the
end of January.
"These estimates still appear too optimistic. We see more
downgrades ahead," Citigroup said.
Shares in Italian carmaker Fiat <FIA.MI> fell more than 9
percent to their lowest in nearly two years after Chief
Executive Sergio Marchionne said sales were a "disaster".
German fashion house Escada <ESCG.DE> warned that sales and
profits for the fiscal year to end-October would not meet its
targets, sending its shares down 6.8 percent in floor trading
<ESCG.F> after the electronic market's close.
BHP Billiton <BLT.L>, down 3.2 percent, led losses in the
heavyweight mining sector <.SXPP> as the price of gold <XAU=>
retreated from Thursday's one-week highs around $908 an ounce.
Anglo American <AAL.L> fell 2.4 percent and Rio Tinto
<RIO.L> lost 1.7 percent.
"I'd be happy to see a rebound in equities, but this is not
going to be easy," said Thierry Lacraz, strategist at Swiss bank
Pictet in Geneva.
"There is only one problem -- the banks, the banks, the
banks -- after the Citigroup warning yesterday and the Moody's
rating cuts for (U.S. bond insurers) Ambac and MBIA," he added.
On Thursday, the finance head of Citigroup <C.N>, the
largest U.S. bank, said the group could have substantial
subprime writedowns in the second quarter.
Among key issues for investors has been the spiralling cost
of fuel and food that has prompted central bankers to reiterate
their intention to tackle inflation even at the expense of
economic growth.
"Clearly the threat of inflation has been growing in central
bankers' and in investors' minds over the last few trading
sessions and again, that said, it's easy to understand why some
short-term optimism has dissipated," said Henk Potts, investment
strategist at Barclays Stockbrokers.
Citigroup said in a European equity strategy note: "The
latest weakness in global equities looks different to that seen
earlier in the year. The focus seems to have shifted from weak
growth to rising inflation and the potential monetary response."
Higher borrowing costs would squeeze company profit margins,
which are already under pressure from rising prices for raw
materials and energy as well as wage claims.
"We expect that in connection with a gloomy macroeconomic
outlook for the eurozone for 2008 as well as for 2009,
sustainable index gains are quite unlikely during the next
months," Raiffeisen said.
(Additional reporting by Sitaraman Shankar and Amanda Cooper in
London; Editing by Quentin Bryar)
