European Stocks Fall in Week; Record One-day Rally Trims Drop

By Henrietta Rumberger

Sept. 20 (Bloomberg) -- European stocks fell this week, as a slump in commodities shares offset a record one-day rally by the Dow Jones Stoxx 600 Index after central banks and regulators stepped in to shore up financial markets.

The benchmark index was headed for its steepest weekly retreat since July 2002, before financial shares yesterday rallied the most in at least 17 years after the U.S. government moved to cleanse banks of troubled assets and international regulators banned investors from betting the value of banking stocks will fall.

``I can't recall ever seeing a roller-coaster market like this before,'' said Carsten Klude, an investment strategist at M.M. Warburg & Co. in Hamburg, which oversees the equivalent of $25 billion. ``The whole financial system in the U.S. has gotten out of joint this week.''

The Dow Jones Stoxx 600 Index fell 0.8 percent this week even after the 8.3 percent rally yesterday, the biggest since data for the index begins in 1987. The index had slumped 8.4 percent between Sept. 12 and Sept. 18. The U.K.'s FTSE 100 Index posted a record advance yesterday and Russia's RTS Index jumped 22 percent after a two-day suspension and President Dmitry Medvedev's pledge of $20 billion to prop up the market.

UBS AG, the European bank with the highest losses from the subprime crisis, slumped as much as 33 percent between Sept. 15 and Sept. 17 after bank lending seized up in the wake of the U.S. government's takeover of American International Group Inc. The stock recovered to close the week 11 percent lower.

`Market Fragility'

The U.S. Federal Reserve agreed Sept. 16 to an $85 billion bailout of the nation's biggest insurer by assets after private efforts failed and the Federal Reserve concluded that ``a disorderly failure of AIG could add to already significant levels of financial market fragility,'' according to a Fed statement.

The week began with European banking shares dropping as Bank of America Corp., the biggest U.S. consumer bank, agreed Sept. 15 to acquire Merrill Lynch & Co., the world's biggest brokerage firm, for about $50 billion and Lehman Brothers Holdings Inc. filed for bankruptcy Sept. 16 after Barclays Plc and Bank of America abandoned talks to buy the crippled firm.

The Dow Jones Europe Stoxx Banks Index has slumped 30 percent this year as financial firms worldwide reported more than $510 billion in credit-related losses. That was the worst performance among 19 groups in the broader Stoxx 600, which has fallen 24 percent.

Banned

The gauge rallied 17 percent Sept. 19, the biggest surge since 1991, after U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke proposed removing troubled assets from the balance sheets of financial companies. Separately, the U.K.'s Financial Services Authority banned speculators from betting against financial shares until Jan. 16 and the U.S. Securities and Exchange Commission temporarily stopped short-selling in shares of 799 financial companies to curtail the market rout.

In a concerted action, the world's largest central banks said they will pump $247 billion into the financial system. The Fed said Sept. 18 it authorized other central banks to auction $247 billion in dollar funds to financial institutions in a coordinated bid to ease the worst crisis facing financial markets since the 1920s. The Bank of Canada and the Swiss National Bank also participated.

National benchmark indexes declined in 13 of the 18 western European markets. France's CAC 40 slipped 0.2 percent. The U.K.'s FTSE 100 retreated 2 percent, while Germany's DAX fell 0.7 percent.

Lloyds Declines

Lloyds TSB Group Plc, the U.K.'s biggest provider of checking accounts, declined 1.3 percent, while HBOS Plc plunged 21 percent, the biggest decline in the banking index.

Lloyds agreed Sept. 18 to buy HBOS for 12.2 billion pounds ($22.2 billion) as the government backed a deal to keep Britain's largest mortgage lender from succumbing to the worsening global credit crisis.

Barclays rose 11 percent. Britain's third-biggest bank said Sept. 17 it will buy the North American investment-banking business of bankrupt Lehman Brothers for $1.75 billion, three days after abandoning plans to buy the entire firm.

ArcelorMittal, the world's largest steelmaker, led a decline in raw material producers, sliding 9 percent, as commodity prices retreated on speculation the seizure in financial markets will hurt the global economy.

Xstrata Plc, the world's fourth-largest copper producer, dropped 3.9 percent and BG Group Plc, the U.K.'s third-biggest oil and natural-gas producer, declined 3.6 percent. Copper has tumbled 24 percent from its July 2 peak of $8,940 a ton because of the risk that the global credit crunch will slow economic growth, reducing demand for industrial raw materials.

``The economic prospects still look poor,'' Neil Dwane, chief investment officer for Europe at Allianz Global Investors' RCM unit, said in a Bloomberg Television interview.

To contact the reporter on this story: Henrietta Rumberger in Frankfurt at hrumberger@bloomberg.net.