European shares hit by Lisbon losses, Russia tensions

Concerns about Portugal's banking system and tensions between Western powers and Russia pulled down European stock markets on Thursday. The European Central Bank kept its main interest rate at a record low 0.15 percent, but the decision had been widely expected by investors and did not move equity markets. Lisbon's benchmark PSI-20 index closed down 2.3 percent, underperforming a 0.7 percent decline on the pan-European FTSEurofirst 300 index and a 1.2 percent fall on the euro zone's bluechip Euro STOXX 50 index.
Traders said the Lisbon market had been hurt by fears over the state rescue of the Portuguese bank Banco Espirito Santo (BES), which has been hit by financial problems associated with its Espirito Santo founding family. Investors are concerned that lenders who contribute to a bank recapitalisation fund, through which the state has injected 4.9 billion euros ($6.5 billion) to carve a healthy new bank out of BES, may end up paying a chunk of the rescue bill.
"The prevailing sentiment in Portugal's stock market is gloomy. The negative sentiment towards the banks in general is shared not only by investors but also by the public at large," said ActivTrades analyst Ricardo Evangelista. European stock markets were also pegged back by tensions between Western powers and Russia. Russia imposed a one-year ban on Thursday on all imports of meat, fish, dairy, fruit and vegetables from the United States, the European Union, Canada, Australia and Norway, escalating the economic battle with the West set off by the crisis in Ukraine. Many German companies have significant business interests in Russia and could therefore be affected by sanctions.
Germany's main DAX equity index fell 1 percent, continuing its retreat from a record high reached in late June. HED Capital managing director Richard Edwards expected the DAX to bounce back soon from those lows, however, with European stock markets still supported by economic stimulus measures from the European Central Bank. ECB President Mario Draghi reiterated on Thursday that the ECB still had the option of using "quantitative easing" (QE) - a means of injecting more liquidity into markets by buying assets such as government bonds - to help the overall economy.
Dan Ison, European equities fund manager at Threadneedle Investments, said the backdrop of support from the ECB, along with better corporate profits and more merger and acquisition activity, would support European stock markets. "Companies in Europe outside of the financial sector have strong balance sheets and cash flow, leading to the prospect of further dividend growth, cash returns and merger and acquisition activity," he said.