London: European shares were down nearly 2% by midday on Tuesday, rattled by growing pessimism over the outlook for financial institutions as the shadow cast by the credit crunch over the sector grows darker.
Rising inflation, falling sentiment and no end in sight to the ripple effect from the credit crisis on the broader economy and companies alike kept European equities under pressure, even with the promise of a fresh wave of merger activity.
Banks were once again the biggest laggards on the European market, bearing the brunt of investor concern about price pressures keeping interest rates high and growth slow, as crude oil broke above $145 a barrel.
Shares in HSBC, German insurer Allianz, Banco Santander and BNP Paribas were the largest drags on the market, falling 2.3 to 5.3%.
European data showed the British consumer price index hit a record high in May, while German investor sentiment hit its lowest level on record.
By 1552 IST, the FTSEurofirst 300 index of top European shares was down 1.9% at 1,112.75, having hit its lowest level in three years.
“It’s just doom and gloom at the moment and there is no sign of an end to it,” said IG index chief markets analyst David Jones.
“The FTSE has hit fresh lows for the year, the DAX is at fresh lows, the inflation figures out of the UK were worse than expected, it’s difficult to see where we’re going to get any respite at the moment,” he said. “Everything is suggesting we’ve got quite a bit lower to go from here.”
Shares in Belgian-Dutch financial services group Fortis tumbled by more than 14% after the Dutch regulator said the company was under investigation. Fortis was not immediately available to comment.
The DJ Stoxx banking index fell 4%. Deutsche Bank fell 4.3%, Royal Bank of Scotland lost 6.4% and UBS shed 4.8%.
“The conditions are foul and it is possible that the downwards spiral continues if a possible run on banks in the U.S. intensifies,” said Stefan de Schutter, an asset manager at Alpha Trading in Frankfurt.
The euro climbed to a new record high against the dollar above $1.60, denting shares in typical exporters such as auto makers. BMW, Porsche, Fiat and Peugeot lost 2.8 to 3.8%.
European shares rose on Monday after the U.S. Treasury and the Federal Reserve outlined a plan to shore up Freddie Mac and Fannie Mae — the country’s two largest mortgage lenders — but concern about the outlook for regional US banks and the broader financial sector persisted.
European credit spreads widened sharply on Tuesday, led by financials, reflecting concern that even the government-led rescue package for Freddie Mac and Fannie Mae will not cure the ills of the financial sector.