European Markets Fall on Disappointing Earnings News

By Tommy Stubbington and Josie Cox 

European stocks fell Thursday, with a fresh plunge for Portuguese lender Banco Espirito Santo compounding investor concerns over an underwhelming corporate earnings season.

BES shares sank more than 50% as they reopened after a two-hour trading suspension, after the company, late on Wednesday, reported a record net loss for the second quarter that highlighted the extent of the financial troubles besetting its parent groups.

Portugal's PSI 20 index closed down 3.1% having hit a new low for the year earlier in the session, while the broader Stoxx Europe 600 ended the session 1.3% lower.

Paris' CAC 40 lost 1.5% and London's FTSE 0.6%, while Germany's DAX underperformed most of the regions' other indexes, falling 1.9% on disappointing results from Adidas and Deutsche Lufthansa.

That overshadowed better-than-expected figures from firms including French drug maker Sanofi and oil giant Royal Dutch Shell which gave French and U.K stocks an early--albeit short-lived--lift.

Around a third of Stoxx Europe 600 companies have so far reported results for the quarter, with nearly half missing market profit estimates, according to FactSet data.

That contrasts with the U.S., where under a quarter of firms have fallen short of expectations. On Thursday, however, the earnings picture in the U.S. was more akin to Europe's, with Exxon Mobil reporting a decline in production and Whole Foods Market Inc. l owering its annual sales projection for the fourth time in nine months. The Dow Jones Industrial Average waned 1% in late European trade, and the S&P 500 lost 1.3%.

Jeremy Batstone-Carr, chief economist and strategist at London-based brokerage and wealth manager Charles Stanley, which has around GBP20 billion ($33.9 billion) of assets under management, said that investors are now starting to worry that expectations of improving profits for the rest of 2014 are looking increasingly far-fetched,

"It's starting to be a leap of faith to think the corporate sector can generate the growth to justify current valuations," Mr. Batstone-Carr said.

On Wednesday, the U.S. Federal Reserve cut its monthly bond purchases to $25 billion, as expected, and offered a mixed view on the economy. That news, however, combined with stronger-than-expected growth data for the U.S. economy, had little overall effect on U.S. stocks on Wednesday.

On Friday, investors will be eyeing the latest nonfarm payroll report out of the U.S., following a release of Wednesday that showed that U.S. businesses had slowed their pace of hiring in July.

Economists believe July nonfarm payrolls will have increased by 230,000. That is down from the 288,000 jobs added in June, but it would be the sixth consecutive monthly gain of at least 200,000 jobs.

In currency markets on Thursday, the euro was broadly unchanged against the greenback having dipped slightly after data showed that euro-zone consumer price inflation slowed further to an annual rate of 0.4% in July.

Inflation remains way below the European Central Bank's target of close to 2%. Bond yields in the euro zone fell to record lows earlier this week with investors increasingly betting the ECB will need to bring in fresh easing measures to combat chronic low inflation.

On Thursday, Germany's 10-year yield fell slightly to 1.16%, compared with its all-time low of 1.11% hit Tuesday. The common currency traded at $1.3388, not far off the eight-month low it hit on Wednesday after the U.S. GDP data.

"The Fed is still hesitant to implement a more restrictive monetary policy. Today's CPI data in the euro zone, on the other hand, will force the ECB to consider the possibility of an even more expansionary monetary policy," said Lutz Karpowitz, a currency strategist at Commerzbank.

In commodities markets, gold fell 0.7% to at $1,287.20 an ounce, while Brent crude oil fell 0.6% to $105.92 a barrel.

Write to Tommy Stubbington at [e-mail] and Josie Cox at [e-mail]

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