European stocks lost ground on Wednesday as merger speculation surrounding Société Générale failed to offset more subprime writedowns by two leading European banks and nervousness ahead of a US interest rate decision.
Talk that SocGen was open to a friendly bid sent shares in the French bank up 4.3 per cent to EU81.80 in defiance of the wider market and in spite of a denial by the bank later in the session.
Fox-Pitt Kelton, the broker, upgraded SocGen from "in line" to "outperform" on takeover hopes.
"The market has now priced in SocGen problems so you get the M&A option on the cheap," said Mark Sartori, head of European equities at Fox-Pitt Kelton.
In the wider market, the FTSE Eurofirst 300 slid 0.7 per cent to 1,329.43, with many investors sitting on their hands ahead of the US Federal Reserve interest rate decision due on Wednesday evening and more US economic data later in the week.
"Everyone is waiting for the Fed and no one is going to stick their heads above the parapet in case it gets blown off," said Edmund Shing, equity strategist for BNP Paribas, adding that volumes were quite thin.
It was a mixed picture for the banking sector, with UBS (NYSE:UBS) falling 1.6 per cent to SFr46.06 after the Swiss wealth manager unveiled a $4bn writedown.
The surprise announcement, coming ahead of the Swiss bank's annual results on February 14, comes after a $10bn writedown on its troubled subprime mortgage portfolio last month.
Meanwhile, BNP Paribas fell 1.2 per cent to EU66.83, after announcing a 42 per cent slump in fourth-quarter profit and EU589m of writedowns due to monoline exposure.
However, money is beginning to flow back into the banking sector despite expectations of more writedowns as fourth-quarter results are announced in coming weeks, traders said.
"The problems are not over yet, but they no longer come as a surprise," said Mr Sartori.
Belgo-Dutch bankFortis climbed 2.3 per cent to EU15.28, Credit Agricolegained 2.4 per cent to EU21.41 and in Switzerland Credit Suisse (NYSE:CS) added 0.3 per cent to SFr61.35.
The automobiles sector took a battering after Goldman Sachs painted a gloomy outlook for carmakers this year. Goldman slashed estimates for net operating profits after tax by 25 per cent saying global car sales would be flat in 2008, after record 5 per cent growth in 2007.
France's Renault was the biggest faller of the day, tumbling 6 per cent to EU75.14 while Peugeot fell 3.1 per cent to EU49.71 and Germany's Porsche fell 3.5 per cent to EU1222.01.
German components manufacturer Continental slid 4.2 per cent to EU71.19 while French tyremakerMichelin lost 3.9 per cent to EU66.43.
Dutch brewer Heineken fell 3.9 per cent after a downgrade from "overweight" to "equal-weight" by Morgan Stanley.
There was also talk that British peer SABMiller was facing declining margins in its South African market.
The energy sector was in the spotlight with Iberdrola rising 3.6 per cent to EU9.56 after a Financial Times report that France's EDF and ACS, Spain's biggest construction company, were in bid talks for the Spanish energy giant.
EDF fell 2.2 per cent to EU69.50 while ACS gained 0.9 per cent to 35.18.
ACS said it had not reached an agreement with EDF on making a takeover bid for Iberdrola.
Galp Energia tumbled 4 per cent to EU15.15 after Iberdrola said it will sell its entire 3.8 per cent stake in the Portuguese oil and gas group at EU15.05 per share.
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