Bloomberg News

European Stocks Fall on China Interest Rates, Portugal Downgrade

July 06, 2011

July 6 (Bloomberg) -- European stocks declined, halting a seven-day rally, as China raised interest rates and Moody’s Investors Service cut Portugal’s credit rating to junk.

Banco Espirito Santo SA and Banco Comercial Portugues SA led Portuguese banks lower, sliding more than 5 percent. Carlsberg A/S, the owner of Russia’s biggest brewer, dropped 4.4 percent after a report that the nation may tighten regulation of alcoholic-drink sales. Scor SE, France’s largest reinsurer, lost 3.1 percent.

The benchmark Stoxx Europe 600 Index fell 0.3 percent to 274.79 at the 4:30 p.m. close in London, ending the longest winning streak in two months. The gauge had surged 4.4 percent over the previous seven days as Greek lawmakers passed a five- year austerity package, qualifying the country for further European Union aid. The measure has still fallen 5.6 percent from its February high amid speculation the region’s fiscal crisis will derail the economic recovery.

“There’s concern from some people that China is pushing the brakes on economic growth a little too hard,” said Richard Hunter, head of U.K. equities at Hargreaves Lansdown Plc in London. “We’ve by no means solved Europe’s debt problem and that is going to need to be revisited again soon.”

Greek Meeting

Greece’s bondholders met with officials in Paris today to discuss a proposed rollover of the nation’s debt as EU leaders insist that private investors contribute to a new aid package for Greece after last year’s 110 billion-euro ($159 billion) rescue. Germany revived a plan for a voluntary debt swap to lengthen Greek bond maturities, underscoring how investors and government officials are struggling to devise a role for creditors in a bailout without triggering a default.

National benchmark indexes fell in all 18 western European markets, except Iceland. France’s CAC 40 Index and the U.K.’s FTSE 100 lost 0.4 percent, while Germany’s DAX Index retreated 0.1 percent.

Stocks extended losses as China raised benchmark interest rates for the third time this year after inflation accelerated to the fastest pace since July 2008. The one-year deposit rate will rise to 3.5 percent from 3.25 percent from tomorrow, the People’s Bank of China said. The one-year lending rate will increase to 6.56 percent from 6.31 percent.

In the U.S., the Institute for Supply Management’s index of non-manufacturing businesses decreased to 53.3 in June from 54.6 a month earlier. A reading above 50 signals expansion. The measure was projected to drop to 53.7, according to the median forecast in a Bloomberg News survey.

Germany Economy

A separate report in Germany showed factory orders unexpectedly increased in May, led by domestic demand for investment goods such as machinery. Orders, adjusted for seasonal swings and inflation, rose 1.8 percent from April, when they surged a revised 2.9 percent, the Economy Ministry in Berlin said.

Banking shares had the worst performance among 19 industry groups in the Stoxx 600 as lenders accounted the nine biggest declines in the index. Moody’s downgraded Portugal’s credit rating to Ba2 late yesterday as the nation joined Greece as the second euro-region country with a non-investment grade rating.

“Portugal’s credit downgrade is definitely the news spoiling the atmosphere today,” said Matthias Jasper, head of equities at WGZ Bank AG in Dusseldorf. “We’re going to see a small setback, but the environment for equities is still positive.”

Portuguese Banks

Banco Espirito Santo, Portugal’s biggest publicly traded bank by market value, slumped 5.7 percent to 2.46 euros while Banco Comercial Portugues, the second-largest, sank 6.9 percent to 36.7 euro cents.

UniCredit SpA, Italy’s biggest bank, dropped 7.1 percent to 1.40 euros, the largest decline in more than a year. Spain’s Banco Santander SA retreated 2.1 percent to 7.85 euros.

“The fear of contagion to much bigger economies than the Greek one looms, as Spain and Italy face elevated debt levels and bleak economic outlook,” said Anita Paluch, a sales trader at ETX Capital in London.

Carlsberg sank 4.4 percent to 545 kroner after Vedomosti reported the Russian government may ban sales of drinks containing more than 0.5 percent alcohol at night and in kiosks.

Scor retreated 3.1 percent to 18.95 euros, the biggest decline since May. The reinsurer said it is boosting its capital as it draws 75 million euros from a natural-catastrophe financial coverage facility provided by UBS AG since the start of the year.

Digital Multimedia, Mediaset

Digital Multimedia Technologies SpA and Mediaset SpA fell 1.7 percent to 20.17 euros and 3.9 percent to 3.12 euros, respectively. Merger talks between Digital Multimedia and Mediaset’s Elettronica Industriale SpA broadcast tower unit are at risk after minority shareholders of DMT rejected an investment plan, Il Sole 24 Ore reported, without saying where it got the information.

Smith & Nephew Plc, Europe’s largest maker of shoulder and knee implants, climbed 1.7 percent to 684 pence amid takeover speculation in the industry. Kinetic Concepts Inc., a maker of wound-care products, is in exclusive talks to go private in leveraged buyout, according to people with knowledge of the matter.

--With assistance from Adam Haigh in Amsterdam and Sarah Jones in London. Editor: Andrew Rummer

To contact the reporter on this story: Julie Cruz in Frankfurt at jcruz6@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer in London at arummer@bloomberg.net;


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