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Food & Drink Woes Weigh on Eurostocks

Mon Sep 20, 2004
By Lincoln Feast

LONDON (Reuters) - European shares fell almost one percent by midsession Monday, hurt by a profit warning from consumer goods giant Unilever and surging energy costs, but oil companies like BP rose with the price of crude.

Unilever tumbled 6.3 percent to 46.80 euros after the Anglo-Dutch company reined in expectations for profit growth this year due to stiff competition and poor weather.

Unilever's warning, which followed a profit warning from Coca-Cola and weak results from Nestle, knocked rivals in the food and beverage sector. Cadbury Schweppes was down 2.2 percent, and Danone was 1.7 percent lower.

Teun Draaisma, a strategist at Morgan Stanley, said fierce competition was damaging the sector across Europe.

"That's really the big, big problem. It's very hard to get topline growth or earnings growth and companies need to spend a lot more to protect their brand names. It's not a strong environment for them."

By 10:56 a.m. GMT the FTSE Eurotop 300 index of pan-European blue chips was 0.7 percent weaker at 994.3 points while the narrower DJ Euro Stoxx 50 index fell 0.9 percent to 2,764.4 points.

European bourses have bounced strongly since hitting 2004 lows last month and while some analysts have suggested a pullback is now on the cards, others are more positive on the outlook for stocks.

"We think a lot of things look pretty good," said Morgan Stanley's Draaisma.

"Bond yields have fallen a lot, which should be good for economic growth; we think the employment prospects -- particularly in the U.S. -- are very healthy and are a great trigger for markets to continue to go higher; and finally, we think valuations are very attractive."

Morgan Stanley favors riskier sectors including semiconductors, software and media, and also likes telecoms, insurance and pharmaceuticals.


But investors and analysts are nervously awaiting the start of the third-quarter earnings season, which kicks off this week with a number of top Wall Street banks reporting.

"We continue to think that Q3 will turn out to be an important milestone in the market cycle," said Bill McQuaker, a strategist at Credit Suisse First Boston.

"The quarter has seen a steady flow of data from the U.S. corporate sector, which indicates that the high point for EPS growth is passing and that negative surprises are picking up sharply."

Markets are also awaiting Tuesday's meeting of the U.S. Federal Reserve, which is expected to raise interest rates by a quarter percentage point.

U.S. stocks nudged higher Friday but early indications were for a weaker open Monday, with high oil prices seen denting sentiment.

U.S. light crude spiked back above $46 a barrel Monday after Russia's YUKOS suspended some oil exports to China and concern lingered over storm-related supply disruptions in the United States.


While the broader market viewed the impact of higher oil prices negatively, energy firms outperformed on hopes their earnings will benefit.

BP rose 1 percent to 524 1/2p, while rival Shell added 0.5 percent.

Fuel-hungry airlines British Airways and Lufthansa were both down about 1.5 percent as higher oil prices raised the prospects of profit margins being squeezed.

Alstom was one bright spot as it gained 4.7 percent after a new cruise-ship contract gave a shot in the arm for its loss-making shipyard months after the heavy French engineering giant was rescued from bankruptcy.




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