Shares drop on recovery doubts

European and US shares dropped for a third straight week, the longest stretch of losses since March, as concern mounted that the economy won't recover soon.

The Standard & Poor's 500 Index slid 2.5 per cent to 896.42 last week. The Dow Jones Industrial Average fell 157.65 points, or 1.9 per cent, to 8280.74.

Europe's Dow Jones Stoxx 600 Index fell 0.2 per cent last week to 204.08 after reports showed unemployment in Europe and the US rose. The measure has fallen 4.8 per cent since June 12 on speculation share prices have outpaced the outlook for economic growth after a three-month rally pushed valuations to 25.4 times earnings, near the highest level since 2004.

The benchmark index for European equities still rose 17 per cent in the second quarter, the biggest gain since 1999.

"Macroeconomic data are still disappointing and show economic recovery is not yet a reality," said Emmanuel Soupre, who helps manage about US$18 billion at Neuflize OBC in Paris. "We are going to keep fluctuating between optimism and pessimism in the months to come."

Unemployment in the 16-member euro region increased to 9.5 per cent in May from a revised 9.3 per cent in April, the European Union statistics office in Luxembourg said this week. The US unemployment rate rose to 9.5 per cent in June, the highest since August 1983.

European Central Bank President Jean-Claude Trichet signalled the ECB had no immediate plans to cut interest rates again and said the euro region's economy would start to recover in the middle of 2010. It kept its key lending rate at a record low of 1 per cent.

Volkswagen slumped 6.3 per cent as Europe's largest carmaker said US sales in June fell 18 per cent. Separately, German car production is expected to drop 17 per cent this year, said Matthias Wissmann, president of the country's carmakers association.

European car shares were downgraded to "market weight" from "overweight" by Credit Suisse analysts, who said, "We see increasing risk to first-half 2010 estimated cash flows as retail volume and price support from scrappage schemes fade."

Car and parts shares lost 2.9 per cent as a group, the second-biggest decline among 19 industry groups in the Stoxx 600. Peugeot, France's largest carmaker, slid 2.8 per cent, while smaller rival Renault declined 2.6 per cent.

Basic-resource shares dropped 3 per cent for the biggest decline in the Stoxx 600. ThyssenKrupp sank 4.4 per cent and Outokumpu, a Finnish stainless-steel maker, dropped 3.2 per cent.

Steel consumption in the region will fall by almost 33 per cent in 2009 as the economic slump saps demand, the European Federation of Iron and Steel Industries said.

Bank shares were the best-performing group in the Stoxx 600 last week, adding 1.2 per cent. Barclays, the UK's third-biggest bank, rallied 11 per cent.

UK consumer confidence increased to the highest level in 14 months in June as shoppers became more optimistic that the worst of the recession was over, GfK NOP said. Debenhams, the UK's second-largest department-store company, rose 12 per cent.

- BLOOMBERG