European Stocks Snap Five-Week Gaining Streak on Profit Concern

By Andreas Hippin

Oct. 20 (Bloomberg) -- European stocks had their first decline in six weeks after earnings from Ericsson AB and Royal Philips Electronics NV missed analysts' estimates, heightening concern that profit growth in the region is slowing.

Ericsson fell to the lowest in more than three years and Philips had the steepest weekly loss since September 2003. Barclays Plc and Deutsche Bank AG led bank shares lower after Bank of America Corp. and Wachovia Corp. in the U.S. said loan losses eroded profits.

``Earnings are more likely to surprise on the downside than on the upside,'' said Jonathan Monk, a fund manager at Aerion Fund Management in London, which oversees $23 billion. ``A lot of people got too bullish, thinking the worst is behind us, and they ran into a set of disappointing earnings.''

The Dow Jones Stoxx 600 Index lost 2.5 percent to 380.88, snapping the longest streak of weekly gains since October 2006. The measure had rallied 11 percent since reaching a five-month low Aug. 16 on speculation profit growth and takeovers would overcome rising debt defaults and a U.S. housing recession.

``The market turmoil has partially eased from August, but not completely, and this is clear from the earnings reported by U.S. banks,'' said Mario Spreafico, who helps oversee the equivalent of $4.3 billion as chief investment officer at Citigroup Global Markets in Milan. ``It's hard to fully quantify the impact of the credit crunch on the economy in coming months.''

The average earnings growth estimate for Stoxx 600 companies this year fell to 9.56 percent from 10.68 percent six weeks ago, according to data compiled by Bloomberg.

National Benchmarks

Crude oil breached $90 a barrel in New York for the first time as the dollar traded near a record low against the euro.

National benchmarks dropped in all 18 western European markets, except in Spain. The U.K.'s FTSE 100 tumbled 3 percent, while Germany's DAX Index decreased 2 percent. France's CAC 40 Index fell 1.8 percent. The Stoxx 50 lost 2.9 percent and the Euro Stoxx 50, a measure for the euro region, slid 1.5 percent.

Bank of America, the second-largest U.S. bank, said Oct. 18 that about $4 billion in trading losses, defaults and writedowns caused third-quarter profit to drop 32 percent, more than analysts estimated. One day later, Wachovia reported its first earnings decline in six years after a record $1.3 billion of writedowns for bad loans and mortgage-backed securities.

``There are negative surprises in the U.S. again and again,'' said Guenther Gerstenberger, a fund manager at Oberursel, Germany-based PEH Wertpapier AG, which oversees the equivalent of $5.5 billion. ``Bank of America was a shocker. Markets might come back a bit in the coming weeks.''

`Concerned, Disappointed'

Ericsson sank 29 percent. Chief Executive Officer Carl Henric Svanberg said reduced demand for network upgrades in North America and Europe hurt margins and fourth-quarter revenue may decline. Svanberg, who told investors on Sept. 11 that industry growth was ``strong,'' said Oct. 16 he was ``humble, concerned and disappointed.''

Philips, the region's largest maker of consumer electronics, fell 8.8 percent after third-quarter profit dropped and the company cut its sales forecast for the medical division.

A measure tracking bank stocks sank 4 percent, the biggest weekly loss in three months. Barclays, the U.K.'s third-largest bank, retreated 9 percent. Deutsche Bank, Germany's biggest, decreased 4.5 percent.

``I wouldn't bet on banks, particularly not those involved in investment banking,'' said Sergi Martin Amoros, who helps oversee the equivalent of $10 billion at Credit Andorra SA in Andorra. ``Bad news is still to come.''

Lower Forecast

UniCredit SpA, Italy's biggest bank, dropped 6.5 percent. Italy's banking association cut its growth forecast for gross operating profit at the nation's banks this year to 12 percent from 14.4 percent Oct. 17 as higher borrowing costs weigh on consumer spending and corporate investment.

SAP AG retreated 4 percent. The biggest maker of business- management software said third-quarter profit increased 10 percent, less than half the pace of U.S. rival Oracle Corp., as revenue in the Americas trailed analysts' estimates.

Roche Holding AG lost 6 percent, the most in more than a year. The world's biggest maker of cancer medicines reported third-quarter revenue that fell short of analysts' projections. Revenue from Tamiflu, one of only two medicines that may help prevent an avian flu pandemic, has peaked because countries have purchased enough supply for an outbreak, Roche said Oct. 16.

Scottish & Newcastle Plc soared 19 percent, the steepest gain in the Stoxx 600, after Carlsberg A/S and Heineken NV said Oct. 17 they are considering a bid for the U.K.'s largest brewer. Scottish & Newcastle has called the approach ``unwelcome.''

Northern Rock Plc, the U.K. mortgage lender bailed out by the Bank of England, plummeted 32 percent, the biggest loss in the Stoxx 600. Credit Suisse Group said there was ``significant downside risk'' following a bid approach from a team led by Virgin Group Ltd. The approach may remove the possibility of shareholders getting zero pence a share, analysts led by Jonathan Pierce in London wrote in a report to clients Oct. 15. Still, ``the problem is the potential dilution,'' they said.