European shares slipped in late trading on Thursday, tracking a sharp sell-off in US stocks, with weaker industrial metals prices on a stronger dollar hurting the mining sector. The STOXX Europe 600 Basic Resources index fell 2.1 percent to feature as the biggest sectoral decliner in Europe after prices of key base metals fell following a rise in the dollar index, which measures the greenback against a basket of major currencies, to a four-year high.
"The dollar is having its bull run right now and that's causing ripples around the world. Metals prices are getting depressed because of the currency and that is going to have a negative impact on mining companies," Lorne Baring, managing director, B Capital Wealth Managemet, said. "The larger commodity players might be able to withstand the downward pressure as they have stronger balance sheets but mid-level players are going to be squeezed."
A stronger US currency tends to make dollar-priced metals costlier for the holders of other currencies and lowers demand for the raw materials. The FTSEurofirst 300 index of top European shares was down 1 percent at 1,372.32 points, after rising to a high of 1,391.80 earlier in the session, with a weaker open at Wall Street triggering the sell-off in Europe.
US stock markets fell 1.1 to 1.6 percent after data showed durable goods orders declined by 18.2 percent in August, the largest drop since the series started in 1992. Also, initial claims for state unemployment benefits rose 12,000 to 293,000 for the week ended September 20. Britain's bluechip FTSE 100 was down 1.2 percent, also impacted by comments from Bank of England Governor Mark Carney who said the central bank was getting nearer to raising interest rates, but the exact date would depend on economic data.
However, analysts said that despite a sharp decline in shares on Thursday, a weaker euro was expected to help European exporters and boost the region's corporate earnings. The single currency fell to its lowest level in nearly two years, reflecting a widening divergence between the monetary policy outlooks of the US Federal Reserve and the European Central Bank.
"The currency headwind reversed in the third quarter and became a tailwind. And the US economy is performing pretty well which should also benefit European earnings. We see the European stock market grinding higher in the medium-term," Robert Parkes, director of equity strategy at HSBC, said. "We believe that earnings will surprise on the upside. Improving earnings revisions ratio reassures and signals that we might finally be coming through the end of the downgrade cycle we have been stuck in for three years now." Analysts and fund managers said the currency drop should give a boost of 3 to 6 percent to earnings, with in particular industrial and pharmaceutical groups such as Siemens and Sanofi, which derive the bulk of their revenues from outside the euro zone, set to benefit.
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