European shares fell yesterday, hurt by mixed corporate earnings and a Federal Reserve official's remarks about inflation which stoked fears of higher US interest rates, but buy-side strategists remained confident.
BHP Billiton Ltd./Plc., the world's biggest miner, disappointed while Nestle, the world's largest food company, drew praise from analysts and its shares hit new highs.
The pan-European FTSEurofirst index of 300 leading shares ended unofficially with a loss of 0.59 per cent at 1,352.94 points - up 6.1 per cent since the start of the year but nearly four per cent below a five-year peak in May.
Volumes were thin with many investors still on holiday. Leading US share indexes, the Dow Jones Industrial Average, the broader S&P 500 and the technology-heavy Nasdaq were between 0.4 per cent and 0.7 per cent lower at the European close.
Buy-side strategists said prospects for European stocks looked good although the near-term outlook was uncertain.
"Valuations remain cheap compared to other markets and Q2 earnings are surprising on the upside," said John Praveen, chief investment strategist at Pramerica International Investment Advisors, referring to euro-zone equities.
So far, positive European corporate earnings surprises had outnumbered negative surprises by 2.2:1, Mr Praveen said, adding that the "earnings outlook for the rest of 2006 remains solid though slower than in the past with GDP growth moderating."
"We keep on seeing good fundamental numbers from the companies and we keep seeing sceptical investors. There is no momentum in the market," said SEB fund manager Andreas Gartner.
"The market short term is somewhat overbought, so we need to relax for some weeks," he said.
Chicago Federal Reserve Bank President Michael Moskow rattled investors by saying inflation was a bigger threat to the US economy than slowing growth and that the Fed might need to raise rates again.
"Rate expectations in the US continue to incorporate some chance of Fed tightening in October, supported by... Moskow's remarks that inflation is outside the comfort zone'," Goldman Sachs said in a research note.
BHP Billiton shares fell 3.8 per cent in London after the firm reported a second-half profit which just met expectations while its $3 billion share buyback disappointed some investors.
"The relatively small scale of this programme and the lack of a special dividend will, we believe, be taken negatively by the market," said Investec Securities mining analyst Nick Hatch.
Sector peer Anglo American fell 3.4 per cent and the The DJ EuroStoxx basic resources index shed 0.9 per cent.
Technology was the day's weakest sector, down 1.4 per cent, as telecom equipment makers Ericsson and Nokia fell 2.2 per cent and two per cent respectively.
Mobile phone software firm Symbian said growth in shipments of handsets running its software had slowed to 58 percent in the second quarter from 73 per cent in the January-March period.
Traders also cited a quarterly revenue forecast for National Semiconductor after the US chipmaker shipped fewer devices to mobile phone customers.
Record high TNT shares fell 2.5 per cent after the Dutch mail firm agreed to sell its underperforming logistics business to a US-based private equity fund for €1.48 billion.
Pulling in the opposite direction, Nestle gained 2.3 per cent to 417.75 Swiss francs, having hit a record high 419.50 francs earlier, bolstered by 11 per cent higher first-half profits.
"Nestle has changed for the better and the company is surprising on the upside, not just barely meeting expectations," Kepler Equities said in a note, reiterating its Buy rating.
"Margins increased 40 basis points to 12.8 per cent (from 12.4 per cent) and underlying food, beverage and nutrition margins were up 30 bps, the first time we can remember such a rise," Credit Suisse said in a note.
"Combined with the slightly raised guidance on organic revenue growth we may see some small upgrades to FY 06 estimates," Credit Suisse added.
Volume in Nestle at 3.5 million shares was almost three times the stock's daily average over the past 30 sessions.
Thursday's European corporate earnings calendar includes cement company Holcim, bookmaker Ladbrokes Plc and windturbine maker Vestas.
Macro-economic highlights are detailed second-quarter German GDP data at 7 a.m. and the German Ifo business climate index at 9 a.m.