By Sitaraman Shankar
LONDON, Jan 22 (Reuters) – European shares were down at midday on Tuesday, though well above the day’s lows, as financial stocks strengthened on hopes that the U.S. would act to avert a recession and provide support to tumbling stocks.
At 1219 GMT, the FTSEurofirst 300 index of top European shares was down 1.1 percent at 1,265.71 points, having swung wildly between losses of 4 percent in early trade to gains of 0.7 percent as talk swirled of interest rate cuts from the United States Federal Reserve and other major central banks.
The European Central Bank, Bank of England and Swiss National Bank would not comment on the rumours cited by traders. No one at the Federal Reserve was immediately available for comment following Monday’s U.S. holiday.
U.S. Treasury Secretary Henry Paulson is due to deliver remarks on the economy, housing and credit markets at 1300 GMT.
At its lowest, the index hit levels not seen in more than two years. On Monday it suffered a 5.8 percent drop, its worst daily percentage fall since the attacks of Sept. 11, 2001.
Banks, which have borne the brunt of a credit crunch stemming from a collapse in the market for risky U.S. mortgages, recovered on Tuesday to contribute most of the index’s gains.
Royal Bank of Scotland, HBOS ,HBOS.L, UBS and BNP Paribas gained between 2.4 and 4.8 percent.
But analysts said the impact of a recession and a credit crunch would begin to hurt company earnings, and stock prices would slip to reflect the deterioration.
“If we do get significant rate cuts it could help, but otherwise we are still in the process of taking valuations down to more realistic levels where you’re factoring in downgrades,” said Canada Life fund manager Mark Bon.
“We will see the impact of financial institutions having to recapitalise leading to a shortage of capital and a credit crunch, and people cancelling investment projects, leading to a slowing of the economy.”
UBS cut its target for earnings per share growth in Europe to zero from 5 percent, and its target for the FTSEurofirst 300 to 1,500.
Banks and insurers were battered on Monday after U.S. bond insurer Ambac lost its vital triple-A credit rating from Fitch Ratings on Friday, putting at risk billions of dollars of corporate and municipal bonds covered by the company.
“The crisis among monoline bond insurers has been a trigger for this sell-off late last week,” said Marie-Pierre Peillon, head of equity and credit research at Groupama Asset Management, in Paris.
“The market has suddenly realised that if they collapse and the dam breaks, we will see more provisions and writedowns from a number of banks,” she said.
Bank of America reported a fall in fourth-quarter profit, hurt by mounting credit losses.
START-OF-YEAR BLUES
The FTSEurofirst 300 has lost 15 percent so far in January alone after gains of 16 percent in the whole of 2006 and 1.6 percent last year, and is down 22 percent since reaching a multi-year high last summer. Many analysts consider a fall of 20 percent from a peak as signalling a bear market.
Consumer-related British shares rose on the interest rate cut hopes. Housebuilder Taylor Wimpey topped the FTSE gainers, jumping 7.5 percent, while housebuilders Hammerson and Persimmon added 2.6 and 4.7 percent, respectively. General retailers also rose.
French electrical engineering group Schneider Electric rose 2.2 percent after it posted 2007 sales growth slightly ahead of market expectations and confirmed its growth target for this year.
Recently battered financial institution Dexia topped French gainers with a rise of 5.8 percent.
But defensive sectors fared poorly, with pharmaceuticals and telecoms among the top negative weights on the index.
Utilities fell hard, with RWE down 4.6 percent and E.ON down 3.7 percent.
Around Europe, Germany’s DAX index was down 2.2 percent, UK’s FTSE 100 index was down 0.7 percent percent and France’s CAC 40 down 1.2 percent.
Energy shares were among the hardest hit as U.S. oil futures shed 4 percent. Total fell 2.2 percent, BP lost 2.7 percent, and Royal Dutch Shell shed 1.2 percent.
U.S. stocks were expected to open lower on resumption after a trading holiday on Monday. S&P 500 futures were down 4.4 percent. (Additional reporting by Blaise Robinson in Paris, editing by Will Waterman)
