Shares down as eurozone fears grip investors

The FTSEurofirst 300 fell 18.89 points, or 1.8%, to 1 027.19 points, having closed out their best week in a month on a high note on Friday.

The index had closed around its 14-day moving average, which proved a ceiling for gains, with Europe’s top shares wedged in a range between about 1 025 and 1 055.

Stocks were supported by the 50% Fibonacci retracement level of the rally that followed the European Central Bank’s (ECB's) first offering of ultra-cheap three-year loans to banks in December.

Investors rushed for safety, which pushed bond yields in indebted peripherals such as Spain up towards the 6% level, after socialist Francois Hollande won the first round of France’s presidential poll, although President Nicolas Sarkozy could still win a May 6 runoff if he gets the backing of the National Front candidate, who had a surprisingly strong run.

In the Netherlands, seen as a more stable eurozone member, the government failed to agree on budget cuts, making elections almost unavoidable and casting doubt on its support for future eurozone measures.

Both the French and Dutch political situations are seen as potentially hampering efforts to stem Europe’s debt crisis.

“It’s beginning to look like the perfect storm,” Stewart Richardson, chief investment officer at RMG, said. He said a leftward lurch in policy for France would be a pretty bad step for Europe.

“(And) if there is a Dutch election coming up soon it just adds to the whole cocktail of worries for the market,” Richardson said.

The STOXX 50 has fallen 13.3% since mid-March as European debt fears, mainly concerning Spain, have risen.

On Monday stocks in Amsterdam and the Paris CAC fell 1.9% and 2.7% respectively, pushing them each to their lowest points in nearly four months, reflecting the political concerns.

Banks, which are hugely exposed to Europe’s debt problems, were down 2.9%, led by Amsterdam-listed ING Groep, which fell 7.2%.

Basic resource stocks fell 2.7% after HSBC’s Flash Purchasing Managers' Index showed China’s factory output was still contracting, although the index did tick higher.

The sector had helped the market climb higher over the past week, gaining 3.3% over the last five trading days and finding support around its 14-day moving average at 464.

A deeper than anticipated slump for the eurozone’s private sector in April did little to help investor sentiment. The data dampened hopes the region will emerge from recession soon, and dented the demand outlook for industrials.

ArcelorMittal fell 5.2% as UBS cut its target price for the stock on earnings worries. That comes after South Korean steelmaker POSCO, the world’s No 3 steelmaker after ArcelorMittal and China’s Baosteel, posted a 54% drop in first-quarter profit on Friday.

UBS said ArcelorMittal’s current market cap reflects a market perception of negative earnings growth of minus 6% into perpetuity.

The eurozone data will come as a blow to German truck maker MAN SE, down 4.7%, which said on Friday it plans to slash costs to bolster profit that fell by more than a fifth in the first quarter.

And German cement maker HeidelbergCement fell 5.6%.

Stocks are well below levels seen a year ago when Europe’s debt problems triggered a market correction and continue to offer value for cash-rich corporates looking to boost flagging earnings outlooks, analysts say.

AstraZeneca, down 1.1%, has agreed to buy US company Ardea Biosciences for $1.26bn, giving it a new gout drug to bolster its weak pipeline.

“(The deal) seems consistent with management strategy although the target indication of the lead product candidate is gout, which has not, traditionally, been an easy target for drug development,” Panmure Gordon said in a note.

On the upside, Cable & Wireless Worldwide leapt 15.3%, paring the previous session’s sharp losses, after Vodafone agreed on Monday to buy the corporate telecoms company for £1.04bn.

French firm Danone initially rose 2.7% after rival Swiss food group Nestlé beat it to the purchase of US drugmaker Pfizer’s infant nutrition business for $11.85bn.

Nestlé was down 2.2%.

Elsewhere, Philips Electronics added 4.5% after it reported better-than-expected quarterly results, thanks to one-off gains and a stronger performance at its consumer and healthcare divisions, in the first signs of a long-awaited turnaround under its new management.

An anticipated weak start on Wall Street also kept stocks down, with no important economic data due out for guidance.