Europe stocks sink again on U.S. recession jitters

By Blaise Robinson

PARIS, Jan 21 (Reuters) – European stocks sank 2.2 percent in early trade on Monday, trading just off their lowest level since August 2006 as U.S. recession fears continued to spook investors and concerns over write-downs hit banking stocks.

Mining and energy shares fell along with commodity prices. Royal Dutch Shell shed 2.5 percent, Total lost 1.9 percent, while BHP Billiton dropped 4.9 percent and Rio Tinto fell 5.5 percent.

At 0942 GMT, the FTSEurofirst 300 index of top European shares was down 2.2 percent at 1,328.48 points, after falling as low as 1,321.22 points.

It is the index’s eleventh drop in 14 sessions. It has already lost 12 percent since the start of 2008 as fears over the prospect of a U.S. economic downturn sent investors running for cover.

Banks took a beating again on Monday, with the DJ Stoxx bank index down 3.1 percent. BNP Paribas was down 5.4 percent and UBS down 4.8 percent.

Societe Generale, which lost 8 percent on Friday on market rumours that the French bank could report write-downs, lost another 5.3 percent.

The sell-off in European banking shares accelerated late on Friday after U.S. bond insurer Ambac lost its vital triple-A credit rating from Fitch Ratings. The cut puts at risk billions of dollars of corporate and municipal bonds covered by the company.

“It’s becoming more and more difficult as the market is now in panic mode,” Hugues Rialan, managing director in charge of discretionary asset management at Robeco France.

“We’re falling back into the crisis of confidence in the financial sector. The banks have been reassuring the market over their exposure to U.S. mortgage-related investments, but now we realise there is nothing reassuring about it,” he said.

“It’s very unsettling to hear market rumours that a bank like Societe Generale could unveil write-downs while it has repeatedly said it doesn’t have exposure to the troubled subprime mortgage market. But the truth might be that they have an exposure, but it is covered by monoline insurers. Now, if these insurers default, as it could well be the case, SocGen’s exposure will resurface.”

Commerzbank was down 4.2 percent. Its designated chief executive told Reuters in an interview that the bank will have to make further write-downs on the value of its subprime-linked investments.

The DJ Stoxx bank index is down nearly 34 percent from its 52-week high, as investors fear that financial institutions have not yet revealed the full impact of the debacle in the subprime market on their books.

“If they had had a much more transparent communication, we would not have all the bombshells, or rumours of bombshells, that we’re having today, with all the negative implication for the market,” Rialan said.

Adding to the gloom, the Markit iTraxx Europe index, which measures the cost of insuring debt from 125 European investment-grade companies, hit a life wide as concerns built over bond insurers.

Around Europe, Germany‘s DAX index was down 3 percent, on track for its biggest one-day fall since may 2006, UK‘s FTSE 100 index fell 2.2 percent and France‘s CAC 40 was off 2.8 percent.

Among the few stocks on the upside, Friends Provident rose 1.7 percent after a report in the Times newspaper said that U.S. private equity firm JC Flowers has made an informal takeover bid of 4.1 billion pounds, or 175 pence a share for the insurer.

British building materials distributor Wolseley fell 5.2 percent after it reported a 26 percent fall in five-month trading profits and warned of tough trading. (Editing by David Cowell)