Pricey oil hits European shares

Oil prices simmering above $59 a barrel and weak bank stocks toppled European shares from three-year highs yesterday, but buoyant energy stocks and hopes of interest rate cuts in the euro zone helped limit market losses.

A surge of crude prices to $59.23 a barrel rekindled concern that high energy costs would squeeze consumer spending and weigh on profit growth at companies such as fuel-hungry airlines - sending Air France shares 2.4 per cent lower.

But it also raised hopes of more bumper profits at energy majors such as BP and Royal Dutch.

The pan-European FTSEurofirst 300 index ended 0.05 per cent weaker at 1,139.1 points, having trimmed earlier losses of around 0.5 per cent after a Reuters report that the European Central Bank is weighing a rate cut, depending on the trend for economic data.

"There are many to think that easing rates would be good for euro zone's economies," said a senior trader in a foreign bank. "They've been thinking that for quite some time but the market had so far gotten the impression the ECB would not budge."

Some strategists said traders of interest rate futures were not betting heavily on an ECB rate cut. Euribor futures rose on the Reuters report but remained below the highs reached earlier this month following a run of weak economic data and after ECB chief economist Otmar Issing refused to rule out a cut.

"According to my back-of-the-envelope calculations, the market sees a 30 per cent chance of an ECB rate cut by December, which isn't much," a strategist at a European bank says.

The difficulty facing the ECB, said monetary sources from euro zone central banks who spoke with Reuters in the past 10 days, is how best to get businesses and consumers spending again. Central bankers appear divided over whether a rate cut would do the trick.

Record-high oil prices remained the overriding driver of sentiment on markets, stoked by gnawing worries about a possible winter fuel crunch. The oil spike, twinned with surging metals prices, added to concern of higher costs weighing on corporate profit margins.

Juergen Lukasser, a fund manager at Constantia PrivatBank in Vienna, said he expected gains in the markets to be limited after a strong run as companies wrestled with these rising costs of inputs.

"Input prices are still rising or staying at high levels. I don't think companies can raise prices or give those margin pressures to their clients," Mr Lukasser said. "If the earnings dynamics are up to (the level of) the last quarter, it would be a surprise."

The DJ Euro STOXX 50 was 0.5 per cent lower at 3,162.1 points as Paris's CAC-40 and Frankfurt's DAX shed 0.7 per cent and 0.4 per cent, respectively. In London, the FTSE 100 index was off 0.1 per cent.