UBS (NYSE:UBS) led European shares on a roller-coaster ride on Thursday when growing fears that losses at ailing bond insurers would pummell the banking sector capped the worst yet January for European stock markets.
The Swiss wealth manager fell more than 9 per cent to a low of SFr41.78 before paring its losses in a late rally to close down 3.8 per cent at SFr44.32, mirroring the volatility in the wider market.
The benchmark FTSE Eurofirst 300 ended the day flat at 1,329.53, bouncing back in Wall Street's wake after falling nearly 2 per cent in early trade. The pan-European index broke re cords to post an 11.7 per cent fall for the month.
Morgan Stanley reinitiated coverage on UBS at "underweight", saying it would underperform both domestic rival Credit Suisse (NYSE:CS) and the wider banking sector because of risky positions in subprime mortgage-linked investments and exposure to monoline bond issuers.
Daniel Zuberbühler, the Swiss banking regulator, warned in an interview that aftershocks from the subprime mortgage crisis could hit other forms of lending, including credit cards and retail loans.
In addition, the risk of widespread downgrades of monolines, which could lose their triple A credit ratings because of their own exposure to the subprime crisis, stoked worries about banks' exposure to the sector. Selling shares in UBS was seen as the best proxy plan for hedging exposure to the growing monoline crisis, traders said.
Mike Lenhoff, chief strategist at Brewin Dolphin Securities, said: "The market has become obsessed with the issue of the monolines and how they see it could amplify the effects of the credit crunch."
Aggressive rate cuts by the US Federal Reserve were the right move and now what was needed was more action by central banks on the other side of the Atlantic, he said.
Fears of further writedowns linked to subprime mortgage investments drove banking sector lower with Dutch financial services provider ING Groep (NYSE:ING) fell falling 3.1 per cent to EU21.68. Belgo-Dutch Fortis was down 2.4 per cent to EU14.88 and Franco-Belgian Dexia dropped 3.7 per cent to EU16.08. Crédit Agricole lost 4.3 per cent to EU20.49. Shares in French insurance company Axa fell 1.9 per cent to EU22.88 as the market shrugged off a solid set of full-year sales figures to focus instead on renewed subprime fears.
"There is a huge contagion effect with the monolines. If the monolines don't get rescued, there will be another sell-off," said Robert Quinn, European equity economist at Standard and Poor's.
Continuing to swim against the tide for the rest of the banking sector, France's Société Générale climbed 1.7 per cent to EU83.20 after BNP Paribas said it was studying a possible bid for its domestic rival. BNP fell 1.5 per cent to EU65.83. The market is expecting a takeover, with traders saying the rogue trading scandal has dented SocGen's credibility too much for it to survive in its present form.
In the results arena, Swedish engineering firm Sandvik fell 4.2 per cent to SKr91 after fourth-quarter pretax profit came in below market expectations, hit by a higher-than-expected writedown on its metal stocks.
Among the gainers, Dutch chemicals company Akzo Nobel (NASDAQ:AKZOY) charged forward 6.8 per cent to EU49.34 after a surprise trading update showed recently acquired ICI performed better than expected in the fourth quarter.
Spain's Iberdrola climbed 6.5 per cent to EU10.18 on bid speculation. Talk in the market was that German utility group Eon might enter the fray, sparking a bidding war. Eon fell 2.1 per cent to EU123.60. French electricity company EDF and Spanish construction group ACS are already thought to be in talks to make a joint bid for Iberdrola. EDF was flat at EU69.52 while ACS fell 0.5 per cent to EU35.01.