LONDON, August 22 – European stock markets closed lower Thursday as higher oil prices back above 120 dollars added to gloom over the economic outlook and the health of the banks.
Dealers said gains made Wednesday were quickly given up as investors contended with fresh reports that banks will have to take yet more losses on their exposure to the US subprime home loan collapse.
Negative comment on banks, especially US investment house Lehman Brothers, plus further pressure on key US mortgage finance providers Fannie Mae and Freddie Mac unsettled markets.
Oil spiked sharply, gaining more than six dollars to 122 dollars as growing tensions between Washington and Moscow over Georgia and US missile defence plans in Eastern Europe jarred sentiment.
"The latest diplomatic stand off with Russia over Georgia … has once again reminded investors of the market\’s sensitivity to all kinds of geopolitical risks," said Sucden analyst Andrey Kryuchenkov of the gains in oil.
In London, the FTSE 100 index held up better than its peers to show a loss of just 0.03 percent at 5,370.20 points.
In Paris, however, the CAC 40 fell 1.40 percent to 4,304.61 points and in Frankfurt the DAX was down 1.18 percent at 6,236.96 points.
The Euro Stoxx 50 index of leading eurozone shares was down 1.41 percent.
The euro was at 1.4870 dollars.
Asian markets offered only a negative lead early Thursday, with Japanese share prices down 0.77 percent as investors continued to fret about the outlook for the global economy.
Hong Kong lost 2.58 percent and Sydney was off 1.1 percent.
In New York, shares slumped as rising oil prices stoked concerns consumers will cut spending and investors pondered the possibility of a massive government bailout for Fannie Mae and Freddie Mac.
The Dow Jones Industrial Average was off 0.42 percent at around 1630 GMT.
"Fannie and Freddie worries and rumors about Lehman and a pulled credit line seem to be sending money back out of the financials and back into commodities," said Phil Flynn at Alaron Trading.
"Now we all have to wonder once again just how bad this credit crisis will get and which bank is going to be the next one that comes tumbling down. How bad are things at Fannie and Freddie and will that mean that money will run to oil for cover."
The latest US data offered no support, dealers said, with the Conference Board\’s forward-looking index of key US economic indicators down 0.9 percent in July, three times more than most forecasts.
In London, dealers said the market did well compared with its peers because higher oil and commodity prices boosted the energy and mining stocks, helping offset weakness elsewhere — notably in the banks.
Global mining giant BHP Billiton rose 2.96 percent to 1,670 pence and its takeover target, Rio Tinto, was up 3.13 percent to 5,142 pence.
In the energy stocks, Shell added 1.51 percent to 1,820 pence and BP was up 1.22 percent at 517 pence.
The banks continued to suffer. HBOS lost 2.94 percent to 272 pence, HSBC fell 2.66 percent to 805.75 pence and Lloyds TSB shed 3.53 percent at 280 pence.
In Paris, losses were much more marked than in London as investors followed oil and a weaker dollar.
"The dollar lost ground, oil regained ground — those were the two drivers for the market. Investors are simply following the theme of the day, it is pretty basic at the moment," one dealer said.
News of a slight pick-up in the eurozone Purchasing Managers Index for August did little for sentiment, with the indicator remaining in negative territory overall.
In the banks, BNP Paribas lost 2.72 percent to 56.81 euros and Societe Generale was down 1.46 percent at 60.73 euros.
In Frankfurt, mortgage specialist Hypo Real Estate fell 2.80 percent at 15.94 euros, Deutsche Bank shed 1.91 percent to 55.96 euros and Commerzbank fell 2.66 percent to 19.62 euros.
IKB, the small business bank hit badly by US subprime losses, jumped 7.84 percent to 2.89 euros after news that US fund Lone Star was taking it over.
Elsewhere in Europe, the Bel-20 index in Brussels fell 0.99 percent, the Ibex-35 in Madrid was down 1.43 percent, Italy\’s Mib 30 shed 1.15 percent, the AEX 25 in Amsterdam lost 0.59 percent and the SMI 20 in Switzerland dropped 1.40 percent.