European shares fell yesterday as financial sector woes weighed on banks such as UniCredit while the high oil price took its toll on airlines and euro strength hurt exporters, notably carmakers.
Leading indexes trimmed steep intraday losses, however, after credit rating agency Standard & Poor's said in a report released late in the European trading day that an end to write-downs was now in sight for big financial institutions.
Some strategists nevertheless warned that the negative impulses that have hammered stock markets for months could continue to haunt investors.
"The adverse effects from the troubles in the credit market are growing worse, the US economy is in recession, Europe is slowing down but Asia is still holding up," said Wolfgang Hoetzendorfer, chief investment officer at State Street Global Advisers in Germany.
"There will be an impact on equity markets through slower corporate earnings growth," he said.
"The financial crisis is dragging on longer than anticipated, commodity prices and the euro remain high and there are persistent worries of a recession in the US," DZ Bank analyst Christian Kahler wrote in an equity strategy note.
DZ Bank cut its forecasts for the DJ EuroStoxx 50 index to 4,000 points on a six-month horizon and 4,100 points in 12 months from 4,450 and 4,600 points earlier.
That index of European blue-chip shares fell 1.3 per cent yesterday to 3,599.58 points. The broader FTSEurofirst 300 index closed 1.3 per cent lower at 1,268.46 points, taking its losses for the year to 15.8 per cent.
With UniCredit down four per cent, the DJ Stoxx bank index was the leading sectoral loser with a drop of 2.8 per cent. UniCredit posted slightly lower-than-expected profits and said it could no longer confirm an earlier 2008 earnings per share (EPS) target.
Cazenove cut its 2008 and 2009 EPS estimates for UniCredit by seven per cent and eight per cent, respectively, citing a lower contribution from the Italian group's investment bank division.
Also among financials, which have been hit the worst by the credit market crunch rooted in the US subprime mortgage market meltdown, Royal Bank of Scotland fell 4.6 per cent, UBS lost 3.8 per cent and Fortis shed 3.5 per cent.
The bank index was down as much as 4.7 per cent earlier in the session but recovered on the back of the S&P report, which said: "The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write-downs of subprime asset-backed securities."
US crude oil rose to a record high of $111.00 a barrel, pulling down shares in European airlines. British Airways dropped five per cent, Spain's Iberia was down 4.1 per cent and Air France-KLM fell 3.6 per cent.
The travel & leisure index, which includes airlines, was the second worst sector, down 2.6 per cent.
The euro climbed to a new high above $1.56, dampening export prospects for European manufacturers such as carmakers and their suppliers. The sector index fell 2.2 per cent.