European stocks ended firmly lower Wednesday as the outlook for banks remained gloomy in the wake of writedowns from Alliance & Leicester and BNP Paribas. Surging U.S. inflation added to the negative sentiment as investors feared the Federal Reserve may be forced to temper its interest-rate cutting cycle.
Many investors will be looking for an appropriate moment to buy into equities as their prices remain at attractive levels, but fears corporate earnings might slow further could make many hesitant.
"It's quite likely that earnings have further to fall in the medium term," Simon Goodfellow, head of European equity strategy research at ING Wholesale Banking, said in a research note Wednesday. But "an awful lot of bad news is priced in already. We may rally before setting new lows for the cycle," he added.
U.S. stocks were lower after the Consumer Price Index showed U.S. inflation had risen in January for a second straight month, helped by rising food costs. The increasing prices could make the Fed think twice before slashing rates again. U.S. stocks edged higher before the European close, however.
The futures had been slightly lower ahead of the open due to a report that an affiliate of private equity group Kohlberg Kravis Roberts is delaying debt repayments, which added to the tension about the global credit markets. Asian markets were heavily sold off in the wake of KKR's uncertainties.
KKR Financial Holdings has renewed talks with creditors after deferring repayment of billions of dollars debt for the second time, the Financial Times reported.
Oil hit $100 a barrel for the second straight session Wednesday shortly after the European market close, as investors focused on a U.S. report that's expected to show crude stockpiles rose for a sixth week.
In corporate news, BNP Paribas reported a 42 percent fall in fourth-quarter net profit, which was in line with previous guidance from the bank. The French bank voiced optimism for 2008 and raised its dividend by 8.1 percent. Shares were 0.5 percent lower.
Also on the earnings front, Dutch financial services group ING said fourth-quarter net profit rose by 7.6 percent to 2.48 billion euros, slightly ahead of the average forecast 2.34 billion euros, boosted by the sale of its ABN Amro stake. The group is also raising its dividend by 12 percent after announcing only a 200-million-euro subprime writedown. Shares were 0.9 percent higher.
Staying in the Netherlands, Heineken missed full-year forecasts as higher input costs and bad summer weather took their toll. But the brewer said it is confident about passing costs on to customers in 2008. Shares fell 6 percent.
In the UK, miner Anglo American's shares were 0.3 percent lower. The company posted a full-year profit in line with analyst expectations, but said that credit market uncertainty would cause a delay in the sale of its Tarmac unit.
And shares in Alliance & Leicester slumped 6.8 percent after the bank reported its 2007 profit tumbled 30 percent as it suffered a $360.4 million writedown on its exposure to risky assets.
Meanwhile, minutes from the Bank of England's recent rate-cutting meeting revealed the Monetary Policy Committee members were unanimous in their decision to ease interest rates.
- Reuters contributed to this report.