European Markets Slide On Higher U.S. Inflation, Continuing Sub-prime Woes

London, England (AHN) - European markets slid Monday after signs of higher inflation in the U.S. doused expectations that the Federal Reserve will cut interest rates further to prevent the American economy from falling into recession.

Benchmark indexes dropped across major western European markets, except Portugal, with most investors taking cover and dumping stocks not only on inflation concerns but further losses on sub-prime mortgages.

The German DAX dropped more than 100 points in late afternoon trading. It shed 108 points or 1.37 percent at 7,839 at 5:10 p.m. in Frankfurt. The British FTSE 100 also slid below 100 points but settled at 6,300, or down 1.51 percent or 96 points at 4:10 in London. The French CAC was also in the red at 5,536 or 68 points down.

A massive sell off rocked Wall Street on Friday after U.S. consumer prices rose 0.8 percent in November, the largest increase in more than two years.

With higher inflation, analysts said the Federal Reserve now has little elbow room to slash further interest rates.

Bloomberg reports that investors now agree that inflation, not a lack of growth, is the top threat to the U.S. economy.

But Europe has its own inflation worries to deal with.

The European Central Bank this month postponed reduction of interest rates as the inflation rate reached a six-year high. It also cut its forecast for economic growth for 2008.

On Monday's trading, European government bonds advanced as investors took refuge in the safety of government debt vis-?-vis the listless equities market.

BHP Billiton Ltd., the world's largest mining company, slid 3 percent after foregoing the buy back of $10 billion of its shares listed on the London Stock Exchange as it keeps its eye on rival Rio Tinto. BHP wants to acquire the world's third-largest mining company for $127 billion.

Still on mining, copper and other industrial metals retreated. Aluminum traded to its two-month low in London on rumors of more output to keep up with the demand of home builders.

Air France-KLM Group, which made a non-binding offer for Alitalia, slid 2.7 percent. Based on the offer, Europe's biggest airline will infuse $1.08 million in Alitalia if named the winning bidder for the Italian national carrier.

In Germany, IKB Deutsche Industriebank AG, the German lender bailed out by KfW Group, fell to its lowest in more than 10 years on worries it will sustain more subprime investments losses.

UBS likewise lost 3.4 percent after Europe's biggest bank by assets wrote down last week $10 billion in fixed-income securities base.

Klaus Kaldemorgen, head of Deutsche Bank's DWS mutual fund unit in Frankfurt, told Bloomberg that earnings estimates for banks will inevitably have to be lowered given the continuing credit crisis.

"What analysts do not account for is that operative earnings will suffer significantly over the coming months," Kaldemorgen, who manages an investment portfolio totaling $387 billion.