By Amanda Cooper
LONDON, May 20 (Reuters) - Crude oil at new record highs and
worrying inflation data on both sides of the Atlantic forced
European shares into their largest one-day slide in two months
on Tuesday.
Mining stocks, which pared some of their recent gains, and
banks were the largest drags on the European equity market,
which came under pressure after data showed troubling increases
in wholesale inflation in the United States and Germany.
In Europe's largest economy data also showed investor
expectations for the economy deteriorated by more than expected.
Crude oil hitting a new high above $129 a barrel <CLc1> fed
by bullish investment bank forecasts added to the concern among
investors that persistent price pressures will curb the ability
of central banks to loosen monetary policy to protect economic
growth.
The FTSEurofirst 300 index <> of top European shares
ended 2 percent down at 1,350.54, making this its worst one-day
fall since March 17, when the index hit a 2-1/2 year low.
"The next move for the market is going to be down and we're
going to have a look at the mid-March lows probably," said
Andrew Lynch, a portfolio manager at Schroders.
"Knock on wood we don't go through (those lows), simply
because there was so much fear and panic around two months ago
... we're not in as bad a situation, but we are by no means out
of the woods," Lynch said.
"The central banks have put in the facilities to ensure
banks aren't going to go bust for liquidity reasons. But they
can't really cut interest rates because inflation is still too
high for that, and so I fear that the cycle of capitalism is
going to have to take its course and we're going to have to
start using swear words like 'recession'."
The FTSEurofirst is still up about 13 percent from the lows
of mid-March, but has shed 10 percent so far this year.
Mining stocks fell led by BHP Billiton <BLT.L> and Rio Tinto
<RIO.L>, which fell 6.9 and 7.9 percent, respectively. But these
declines come just days after shares in both companies hit
record highs.
Antofagasta <ANTO.L> and Xstrata <XTA.L> fell 4.5 to 6
percent, while Kazakhmys <KAZ.L> fell by more than 7 percent.
TOP PERFORMER
The DJ Stoxx European Basic Resources index <.SXPP> fell 5.2
percent after rising 7 percent in the past four days. This index
has risen 14 percent this year, making it the top performer
among the 18 sectoral indices.
By comparison the DJ Stoxx telecoms index <.SXKP> is down 20
percent in this time.
"It's a switch out of the sector to pay for banks' rights
issues," said a trader. Several banks have unveiled large rights
issues to help shore up balance sheets ruptured by losses linked
to credit market investments.
Oil stocks were among the largest drags on the market. BP
<BP.L> and Royal Dutch Shell <RDSa.AS> were down 1.4 to 2.3
percent, while France's Total <TOTF.PA> lost 0.3 percent.
Banks were the biggest laggards in the wider market. HSBC
<HSBA.L> lost 2.3 percent, Banco Santander <SAN.MC> fell 1.4
percent, BNP Paribas <BNPP.PA> fell 1.8 percent and Credit
Suisse <CSGN.VX> lost 2.5 percent.
Across Europe, Britain's FTSE <> lost nearly 3 percent,
Germany's DAX <> fell 1.5 percent and France's CAC <>
shed 1.7 percent.
After stellar German economic growth numbers last week,
investors were brought down to earth by the ZEW index of
investor sentiment, which worsened in May for the second
straight month.
"German investors have become more pessimistic as the strong
euro and high oil and food prices are about to take their toll
on the German economy," ING economist Carsten Brzeski said in a
note.
"More than before the future path of the German economy will
depend on private consumption and this is still sluggish.
Welcome back to reality."
Among the very few gainers on the FTSEurofirst 300 were
British Land <BLND.L>, which rose 1.1 percent after Britain's
second largest property company said the pace of decline in the
value of its assets was slowing, following better-than-expected
full-year figures.
Utilities EDF <EDF.PA> and Gaz de France <GAZ.PA> both rose
between 0.6 percent and 1.1 percent.
(Additional reporting by Sitaraman Shankar in London and Eva
Kuehnen in Frankfurt; Editing by David Holmes)
