By Peter Starck
FRANKFURT, April 3 (Reuters) - European stocks lost ground
on Thursday, reversing a two-day winning run, as financials such
as Swiss bank UBS <UBSN.VX> fell on fears of more writedowns and
economic data pointed to slower euro zone and U.S. growth.
The FTSEurofirst 300 <> index of top European shares
ended 0.4 percent lower at 1,312.10 points, having gained more
than 4 percent over the past two sessions on hopes that the
worst of the asset writedowns in the banking sector may be over.
UBS dropped 4.7 percent to 32.40 Swiss francs, contributing
to a 1.9 percent slide for the DJ Stoxx European banks index
<.SX7P>. Fox-Pitt Kelton said UBS faced "operating challenges
around cost cutting, staff departures and capital constraint."
"This is a challenge for a new management team against the
backdrop of a difficult operating environment," Fox-Pitt Kelton
said, noting that "the end of writedowns is not guaranteed."
WestLB cut its target price for UBS to 48 francs from 53
francs. JPMorgan slashed its 2008 and 2009 earnings per share
forecasts for the Swiss bank by 36 percent and cut its target
price to 45 francs from 55 francs.
Also among financials, Britain's Lloyds TSB <LLOY.L> fell
4.2 percent, French insurer AXA <AXAF.PA> was down 3.5 percent
and Royal Bank of Scotland <RBS.L> shed 3.5 percent.
Goldman Sachs downgraded Lloyds to "sell", and Lehman
Brothers, in a European banks sector note, said: "Higher credit
costs will be the main driver of banks' performance ... the UK
banks remain highly leveraged to domestic credit, deposits and
capital and are likely to continue to underperform until asset
values near their bottom."
"With (credit) indices such as the ABX and the CMBX
finishing the (first) quarter significantly lower than both
year-end and the end of February, further structured
credit-related writedowns are certain to be a feature," Lehman
Brothers said, referring to the U.S. financial industry.
It added: "This could again lead to concerns that those
European banks which have not taken sufficiently conservative
marks could again face writedowns."
Richard Woolnough, manager of the M&G Optimal Income Fund at
M&G Investments with some $325 billion in assets under
management, addressed the same theme.
"Until now, most of the writedowns have been based on market
prices at end-2007. Since then, prices of structured credit
products and structured bonds have fallen further. In my
opinion, the wave of writedowns will continue," said Woolnough,
whose fund is distinctly underweight financial stocks.
PROFIT-TAKING
Traders linked some of Thursday's losses in the financial
sector to profit-taking ahead of key U.S. jobs data on Friday.
By Wednesday's close, the DJ Stoxx bank index <.SX7P> had
risen 20 percent from a 43-month-low set on March 17. The
catalyst of the rally was U.S. investment bank JPMorgan's
<JPM.N> planned takeover of troubled rival Bear Stearns <BSC.N>.
Data released on Thursday showed the number of U.S. workers
applying for unemployment benefits at the highest level since
September 2005, stoking fears that U.S. growth has stalled.
Another data set found that the U.S. service sector
contracted for the third consecutive month in March, though the
rate of retrenchment was less severe than expected.
A euro zone services index also fell in March, implying
slower growth.
"The (euro zone) service sector appears more exposed to
weakening consumer sentiment in the face of dramatic rises in
food and energy prices which have reduce household purchasing
power," Bank of America said in a note.
"The fallout from the global credit crunch is also likely
hurting business sentiment within financial services," it added.
Around Europe, Britain's benchmark FTSE 100 index <>
fell 0.4 percent while Germany's DAX <> and the French CAC
40 <> both dropped 0.5 percent.
Among notable gainers, Syngenta shares <SYNN.VX> rose 5.9
percent after the Swiss agrochemicals group raised its earnings
outlook, cashing in on roaring demand for farm goods.
"We see this as very positive news and expect upgrades to
consensus numbers," said Credit Suisse, which rates the stock
"outperform".
The DJ Stoxx European chemicals index <.SX4P> was the day's
top sectoral gainer with a rise of 1.5 percent. Yara <YAR.OL>
put on 6.8 percent to 306 Norwegian crowns helped by JPMorgan
raising its target price for the stock to 380 crowns from 350.
Air France-KLM shares <AIRF.PA> rose 2.4 percent to 19.35
euros after the collapse of takeover talks with Italian flag
carrier Alitalia <AZPIa.MI>, whose shares were suspended.
"Excluding the Alitalia risk, investors should now value Air
France-KLM on more fundamental criteria," Landsbanki Kepler
said, reiterating its "buy" rating and target price of 30 euros.
(Additional reporting by Sitaraman Shankar in London and Blaise
Robinson in Paris; Editing by David Cowell)
