August 18, 2004

PARIS (Reuters) - A late-session stabilization of oil prices helped European shares end mostly in the black Wednesday, but food giant Nestle fell heavily amid signs record raw material prices were capping its profitability.

The FTSE Eurotop 300 index inched 0.04 percent higher to end unofficially at 951.8 points, just 1.8 percent above Monday's 2004 intraday low of 934.72 and some 7.7 percent below a multi-month high of 1,030.86 points set at the end of April.

The DJ Euro Stoxx 50 index edged up 0.4 percent to 2,627.7 points in summer-thinned volumes of barely 1.8 billion ($2.2 billion).

Putting upward pressure on crude prices were fresh threats by rebel militia in Iraq against oil facilities, a fall in U.S. crude stockpiles and evidence from major economies that energy costs are not substantially slowing the economic growth that fuels oil demand.

U.S. oil prices around $47 a barrel weighed on airlines such as British Airways (BAB: Research, Estimates) and dogged market sentiment as investors priced in the risk that high crude prices could hamper economic and earnings growth.

U.S. crude oil prices, which had spiraled to a new record peak of $47.35 a barrel early in the session, retreated to $46.85 shortly before European bourses closed. Prices were back at $47.08 by 1600 GMT.

Shares in Nestle tumbled 5.1 percent on news that higher raw material costs -- and in particular packaging materials vulnerable to oil prices -- had eaten into the Swiss group's first-half results.

Nordic bank Nordea cheered investors by reporting net interest income and costs that beat analysts' expectations, sending its shares 5.2 percent higher.

Oil bedevils market
Deutsche Bank said for every $10 move in the oil price, economic growth was hit by 0.5 percent, which will impact companies generally as consumers spend less on goods to pay for higher fuel prices.

However, transactions in oil derivatives show that some companies have hedged their fuel purchases, so this will alleviate some of the pain, said Deutsche European strategist Bernd Meyer in Frankfurt.

Around Europe, the FTSE 100 was 0.1 percent lower, while the DAX added 0.6 percent and the CAC 40 was 0.2 percent firmer. The Swiss blue chip index shed 1 percent.

Eric Mijot, head of equity research and strategy at SG Asset Management, said equities would eventually find some support as investors return to beaten-down shares, which do not reflect that companies' growth prospects are still positive.

"There will be a level at which investors will go back to the market as valuations have integrated a lot of bad news," he said.

"We are not talking about a recession but merely slower growth, so we are bound to see equity gains again linked to the fact that all these fears on growth were exaggerated."

"But knowing when markets will decide to think positively again is a tricky question to answer, maybe in the autumn, when prospects for 2005 become clearer," Mijot said.

Airlines hurt
Fuel-hungry air carriers were under pressure as Europe's largest carrier Air France-KLM joined rivals Wednesday in raising ticket prices to offset soaring jet fuel costs.

Citigroup Smith Barney lowered its earnings forecasts for all of the European airlines it covers and slashed its target price and stock recommendation on Air France. Although shares in Air France bucked the downward trend to rise 2.9 percent, rivals such as Lufthansa and British Airways shed 0.2 percent and 2.2 percent respectively.

Banks were a mixed patch, with Barclays (BCS: Research, Estimates) off 2 percent as it went ex-dividend and announced the acquisition of U.S. credit card issuer Juniper Financial for $293 million.

The market's sour mood was lifted a little by the prospect of merger activity in telecoms.

Telekom Austria (TKA: Research, Estimates) jumped anew, while Swisscom (SCM: Research, Estimates) eased as the market braced for the former's partial sale to the Swiss operator for around 3.4 billion.

Elsewhere, fine paper maker M-real shed 12 percent as the troubled firm launched a 450 million rights issue and an extensive business overhaul to shore up its ailing balance sheet, sending its shares to near two-year lows.

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