European Stocks Decline on Earnings Concern; HSBC, Renault Drop

By Michael Patterson

Oct. 25 (Bloomberg) -- European stocks posted the second- steepest weekly drop in six years as a worse-than-expected slump in the U.K. economy and disappointing forecasts from Renault SA, Air France-KLM Group and OC Oerlikon Corp. spurred speculation that earnings expectations are too high.

HSBC Holdings Plc and Barclays Plc, the biggest U.K. banks, fell 13 percent as a 0.5 percent decline in second-quarter gross domestic product signaled Britain may be in the grip of its first recession since 1991. Renault lost 22 percent, Air France declined 20 percent and Oerlikon declined 24 percent. ABB Ltd., the world's largest builder of electricity grids, declined 23 percent on orders that missed analysts' estimates.

Europe's Dow Jones Stoxx 600 Index lost 7.2 percent this week to 198.82, the lowest since June 2003. The retreat was the second-biggest since July 2002, after a 22 percent slump two weeks ago.

``Most companies reporting earnings this week have disappointed or given cautious outlooks,'' Bertrand Lamielle, head of equities at B*Capital in Paris, which oversees $5.1 billion, said in an interview on Bloomberg Television. ``We're waiting for less volatility to start investing again.''

The Stoxx 600 has retreated 45 percent this year as a freeze in credit markets sparked by $659 billion of asset writedowns and credit losses at banks raised concern that the global economy is headed for a recession. The benchmark is valued at 8.3 times the reported earnings of companies in the index, the lowest since Bloomberg began tracking the data in 2002.

Indexes Drop

National benchmark indexes fell in all 18 western European markets except Iceland, with Germany's DAX sinking 10 percent. France's CAC 40 dropped 4.1 percent, while the U.K.'s FTSE 100 retreated 4.4 percent. About $30 trillion of market value has been erased from global equities in 2008, with about a third of the decline coming this month, Bloomberg data show.

The U.K. is the first of the Group of Seven nations to announce GDP figures for the third quarter. The International Monetary Fund predicts the world's advanced economies will grow at the slowest pace since 1982 next year as the U.S. falters.

HSBC declined 13 percent. Morgan Stanley lowered earnings estimates for the lender on concern its Asian operations face the same turmoil roiling financial markets in Europe and America.

Barclays declined 13 percent after the bank was lowered to ``neutral'' from ``buy'' at UBS AG, which said earnings and dividends may be hurt as it shores up capital amid a slowing economy.

Libor

The thaw in lending that began earlier this month after policy makers pumped cash into money markets and governments bailed out banks may be faltering as the global economy slides into a recession.

The London interbank offered rate, or Libor, that banks charge for overnight loans in dollars, climbed 7 basis points to 1.28 percent Oct. 24, the British Bankers' Association said. It gained for the first time in 10 days Oct.23. The comparable rate for U.K. pounds jumped 19 basis points to 4.75 percent.

Renault declined 22 percent. France's second-largest carmaker cut its full-year profit and sales goals after third- quarter revenue fell 2.2 percent amid a slump in auto demand.

PSA Peugeot Citroen, Europe's second-biggest carmaker, cut its full-year earnings target and said production will be slashed by 30 percent following a ``collapse'' in the global car market. The shares lost 11 percent.

Daimler

Daimler AG, the world's second-biggest maker of luxury cars, also cut its full-year earnings forecast, sending the shares down 13 percent.

Earnings at the 66 companies in the Stoxx 600 tracked by Bloomberg that reported profits since September sank by an average of 19 percent, Bloomberg data show. Analysts expect profit for companies in Europe's Stoxx 600 to decline 4.4 percent in 2008, down from 11 percent growth predicted at the start of the year, according to projections compiled by Bloomberg.

Air France dropped 20 percent after Europe's biggest airline said it will be ``very difficult'' to meet full-year earnings targets as the financial crisis undermines demand for travel.

OC Oerlikon, the world's biggest maker of spinning machines, cut its full-year forecast for operating profit on slumping textile-equipment demand. The shares lost 24 percent.

ABB declined 23 percent after orders at the world's largest builder of electricity grids advanced 7 percent to $8.89 billion, down from 33 percent growth a year earlier and short of the $9.56 billion predicted by analysts. Net income rose to a record $927 million, also short of analyst estimates.

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.