Banks to Set Tone for European Stocks

The fate of European stocks rests with banks next week, as big financial institutions are due to report earnings and investors will remain very nervous about the health of the sector, analysts said on Friday.

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The week will be peppered by potentially market-moving numbers from the likes of Barclays, BNP Paribas and Alliance & Leicester. Signs of deepening problems could set back hopes of a recovery in the major indexes, according to Geoff Wilkinson, head of investment research at Mint Partners.

"Banks are a bellwether indicator for the overall economy," Wilkinson told CNBC.com.

Without a recovery in banking stocks, a broader rebound in the stock markets is unlikely, Wilkinson said.

Fears of further writedowns by the major banks will cast a shadow over the week, following comments from Citigroup analysts on Friday that UBS could face another $18 billion in writedowns.

The Swiss bank already wrote down $18 billion last year because of its exposure to risky U.S. mortgages and related assets, and Citigroup estimated that for its remaining exposure of $80 billion, UBS could mark down between 12 billion and 20 billion Swiss francs.

A UBS spokesman declined to comment on future writedowns, saying only "our exposures are disclosed."

"If the market deteriorates further there definitely would be more writedowns, but not only at UBS," Georg Kanders, analyst from WestLB Research, told CNBC.com.

Ray of Hope?

But other analysts think the worst of the writedowns might be over, as the biggest ones have already been accounted for.

"The end of the European earnings announcements will signal a low point of subprime-related issues," Ralph Silva, an analyst from Tower Group, said.

The EuroStoxx banking index has wiped out all gains made since the end of 2005.

Economic data will also be closely watched for signs the banks' troubles are feeding through to the real economy, in releases such as the Euro Zone Purchasing Managers’ Index on Friday. However, it may be too early to see the full effect on economic activity, Wilkinson told CNBC.com.

"The real economy doesn’t stop working because financial analysts call a recession, it may be a few more months before we see hard evidence in the economy," Wilkinson said.

Adding to the overall picture are key earnings reports from German pharmaceutical company Merck and UK drink and snacks maker Cadbury Schweppes.

Dutch insurance giant's ING earnings, due out on February 20, will be closely watched as ING's shares fell this week on speculation that it would announce writedowns because of exposure to the U.S. market.

Meanwhile the independence of Kosovo hangs in the balance as EU foreign ministers prepare to vote on the country's future at a meeting on Tuesday.

And investors should get an insight into the Bank of England’s interest rate policy as minutes from the recent rate-cutting meeting will be released on Wednesday.

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