UPDATE: European Stocks React Cautiously To War

sg.biz.yahoo.com Friday March 21, 3:49 AM (This updates a story that ran at 1712 GMT with DAX closing price) By Maria Daly Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--European stocks ended mostly lower in thin volume Thursday as investors reacted with caution to news that the war in Iraq had begun.

At the close, London's FTSE-100 Share Index was up 0.01% at 3765.7, while Paris's CAC-40 Index fell 1.5% to 2794.83. At 1657 GMT Frankfurt's Xetra Dax Index closed 0.4% lower at 2604.85.

David Buik at Cantor Index said market volume was negligible on the first day of war in comparison with previous sessions, as the market remained preoccupied with watching battle progress in the Gulf.

U.S. President George Bush's statement Wednesday evening that war may be drawn out also caused investors to be sidelined. Traders commented that hopes for short conflict gave way to fears of a protracted campaign.

Economist Neil Parker at Royal Bank of Scotland said market sentiment is likely to continue being fueled by the drip-feed of news on Iraq as traders look for evidence of a quick U.S. victory.

He added that concern over use of chemical weapons is likely to unsettle sentiment and as troops move closer to Basra and Baghdad there is likely to be a heightened sense of unease. "In the current environment, investors are loathe to increase their exposure to risk," he said.

The assumption of a short successful war with Iraq is now being tested, said strategists at ABN Amro.

Morgan Stanley Chief Global Economist Stephen Roach warned that investors shouldn't conclude that U.S. military supremacy will lead to the perfect victory in Iraq.

"Courtesy of global terrorism, the proliferation of weapons of mass destruction, and the breakdown of once steadfast alliances, today's world is a far more unstable and much scarier place than it was in the aftermath of the Gulf War of 1991," he said in a note published Thursday.

Russian President Vladimir Putin Thursday demanded a quick end to the U.S.-led attack on Iraq, saying it was in no way justified and calling it a "big political mistake."

Analysts also warned that even if it is a short sharp war, any resultant "victory rally" may stall on the less- than-sparkling prospects for global economic recovery.

Friday's session is likely to remain closely tied to reports of military progress from the war zone, but markets may also experience volatility due to the expiration of derivative contracts across the region.

Most European markets will experience "double witching," which occurs when the contracts for stocks index futures and stock index options expire on the same day. Traders expect Friday's expiration of derivatives contracts to be extremely volatile.

"Tomorrow's trade could be dramatic to say the least, but in the meantime sentiment remains undecided," commented one London trader.

Oil stocks were higher in late trade after unconfirmed reports that two Iraq oil fields were on fire. However, gains were tempered as both Saudi Arabia and Venezuela have pledged to keep the oil flowing during wartime. BP ended up 0.7% at 417.25 pence in London.

Insurance stocks - one of the strongest performing sectors in recent sessions - reversed course Thursday.

Europe's largest insurer, Allianz, said it would raise at least EUR5 billion in a bumper rights issue and bond sale. Shares fell 8.9% to EUR59 in late trade, leading decliners in Frankfurt.

The rights issue, the biggest ever in Germany and the largest one to be underwritten, will boost the number of outstanding Allianz shares by as much as 50% from the current 243 million.

Separately, Munich Re, the world's largest reinsurer, said it and Allianz will reduce their reciprocal shareholdings to around 15%. Munich Re also said it intends shortly to strengthen its capital base through the issue of subordinated bonds. Shares fell 6.7% to EUR76.59.

French insurer Axa came under pressure after credit ratings agency Moody's downgraded the company's senior debt rating, warning that volatile stock markets could continue to affect profitability. Shares fell 4.8% to EUR11.7, leading decliners in Paris.

Other notable decliners included Sage Group, the U.K.'s largest maker of accounting software. Shares fell 12.1%, to 123 pence after UBS Warburg cut its rating on the company to reduce from neutral.

At 1657 GMT, the Dow Jones Stoxx Index of shares in European companies was trading down 0.6% at 178.22, while the Dow Jones Euro Stoxx Index, which tracks companies in countries that joined the single currency, fell 1.3% to 170.20.

The Dow Jones Euro Stoxx 50 Index was down 1.6% at 2152.7 and the Dow Jones Stoxx 50 Index was down 0.6% at 2223.9.

-By Maria Daly, Dow Jones Newswires; +44-20-7842-9308; maria.daly@dowjones.com