By Amanda Cooper
LONDON, Feb 5 (Reuters) - Fresh worries about the outlook
for the U.S. economy after a dismal reading of service sector
activity stripped 3 percent off European shares on Tuesday as
financials and auto stocks led the decline.
The FTSEurofirst 300 index <> ended the day down 3.1
percent at 1,314.36, bringing the loss for this year to about 13
percent.
The index dropped after data showed the worst performance in
the U.S. service sector in more than six years in January,
hitting bank stocks and adding to the belief the world's largest
economy may be tilting into recession.
"It is not pointing in the right direction and the markets
are saying so. I think that coming on top of the non-farm
payrolls we had ... if there was a prospect that the (U.S.)
econmy was tipping towards recession, that prospect has
increased," said Brewin Dolphin chief strategist Mike Lenhoff.
"Clearly, it's not great news for the markets and it means
more of what we've seen thus far, more volatility, more concern
about the outlook and more confirmation of the view that
interest rates are going to have to fall."
Banks were the worst performers, as fears of a U.S.
recession combined with a series of broker downgrades dragged
down the entire sector.
JP Morgan cut its price targets on Credit Suisse <CSGN.VX>,
UBS <UBSN.VX>, Deutsche Bank <DBKGn.DE>, BNP Paribas <BNPP.PA>,
Credit Agricole <CAGR.PA> and Natixis <CNAT.PA>, which all fell
between 3.9 to 5.8 percent.
HSBC <HSBA.L> lost 2.4 percent, while Royal Bank of Scotland
<RBS.L> lost 5.6 percent.
WOES SPREADING?
Euro zone services growth also slowed sharply in January,
according to a report that may stoke more fears of a European
recession.
The spate of stocks-negative data led to a spike in the
DAX-NEW volatility index <.V1XI> -- often used as a measure of
investor risk aversion. The index rose by nearly 14 percent in
its largest one-day rise since Jan. 21.
Fears of a global recession have kept stock markets under
pressure for most of this year and have prompted aggressive
interest rate cuts from the Federal Reserve.
Investors are now waiting to see how the Bank of England and
the European Central Bank will deal with the global downturn in
their monetary policy meetings later this week.
Results from Deutsche Bank and Banco Santander <SAN.MC> are
due this week. Other major companies to report this week include
BHP Billiton <BLT.L>, Electrolux <ELUXb.ST>, Parmalat <PLT.MI>
and Unilever <UNc.AS>.
Also lagging were auto stocks, which succumbed to the twin
forces of evidence of a slowdown in growth and more broker
downgrades.
BMW <BMWG.DE> lost 6 percent, while Porsche <PSHG_p.DE> fell
5.6 percent. French rivals Renault <RENA.PA> and Peugeot
<PEUP.PA> lost 7.4 and 6.1 percent, respectively.
Among the few gainers in the broader European market was BP
<BP.L>, which rose after reporting a more generous dividend
policy and plans for cost cuts which eclipsed weak quarterly
results.
BP reported a big drop in profits due to refining losses,
rising costs and service station write-downs but higher
production, planned job and cost cuts and a more generous
dividend policy pushed its shares higher by 2.3 percent.
"The numbers are disappointing ... but I think that is more
than made up for by the fact that we have got a step change in
the dividend," said Peter Hitchens, oil analyst at Seymour
Pierce.
BP shares rose 0.2 percent, while Total <TOTF.PA> and Royal
Dutch Shell <RDSa.AS> lost between 2.3 and 2.7 percent.
Dutch telecoms group KPN <KPN.AS> was among early gainers in
Europe, after giving an upbeat three-year outlook as it reported
quarterly results that matched forecasts. But shares ended the
day flat as the broader market declined.
Around Europe, Germany's DAX index <> was down 3.4
percent, Britain's FTSE 100 index <> lost 2.6 percent and
France's CAC 40 <> fell nearly 4 percent.
(Additional reporting by Ana Nicolaci da Costa; editing by
Elaine Hardcastle)
