Bloomberg News

European Stocks Post Weekly Drop as U.S. Debt-Limit Talks Stall

July 29, 2011

July 30 (Bloomberg) -- European stocks slid this week as U.S. lawmakers failed to agree on a deal to raise the federal government’s debt ceiling before the Aug. 2 deadline when rating firms may decide the country has defaulted.

Banking stocks led declines on the benchmark Stoxx Europe 600 Index as Banco Popolare SA, Dexia SA and Alpha Bank SA all retreated at least 13 percent. Alcatel-Lucent SA, France’s largest telecommunications-equipment maker, plunged 23 percent on concern that U.S. mobile operators will cut spending.

The Stoxx 600 retreated 2.5 percent to 265.25 this week, extending its decline for June to 2.8 percent. The gauge has fallen 8.9 percent from this year’s high on Feb. 17 as investors speculated that Europe’s sovereign-debt crisis would spread from Greece to the larger economies of Spain and Italy.

“It’s the hangover from the U.S. debt situation” that is weighing on markets, said Martin Dobson, head of trading at Westhouse Securities Ltd. in London. “I think markets will still be trading very carefully and very tentatively” if politicians vote to increase the debt ceiling, Dobson said.

European stocks extended their weekly retreat as concern mounted that Republicans and Democrats will fail to agree to increase the U.S. debt ceiling by the Treasury Department’s Aug. 2 deadline. House Speaker John Boehner fell short of the votes within his own party needed to increase the U.S. debt limit after a night of one-on-one appeals to members. President Barack Obama had threatened to veto the Republicans’ plan.

Senate Democrats plan to break the impasse by devising a strict enforcement mechanism to guarantee future deficit savings, according to Democratic officials. The talks center on setting up automatic spending cuts or tax increases, or some combination of the two, if the government fails to stay within the debt limit.

U.S. Economic Growth

The U.S. Commerce Department announced that the world’s largest economy expanded at a 1.3 percent annual pace in the second quarter. Economists had predicted growth of 1.8 percent, according to the average estimate in a Bloomberg survey. The Commerce Department also revised growth in gross domestic product for the first quarter down to 0.4 percent.

In Europe, Moody’s Investors Service placed Spain’s Aa2 rating on review, saying a cut would probably be “limited to one notch.” Spain’s Prime Minister Jose Luis Rodriguez Zapatero brought forward elections to Nov. 20 from March, as austerity measures have eroded support for his ruling Socialist Party.

A gauge of banking stocks slid 4.7 percent this week. Banco Popolare, Italy’s fourth-biggest bank, plunged 13 percent, while Dexia, Belgium’s largest lender, sank 13 percent. Alpha Bank slumped 15 percent.

Veolia, Suez Slide

Veolia Environnement tumbled 13 percent to its lowest price since April 2009. The utility said it won’t meet its forecast for net income growth this year because of weaker business in southern Europe and north Africa. Suez Environnement Co. declined 3.3 percent.

A gauge of carmakers posted the biggest drop of the 19 industry groups on the Stoxx 600. Daimler AG, the world’s third- largest maker of luxury cars, decreased 3.5 percent to 50.66 euros.

Volkswagen AG sank 6.3 percent as Europe’s largest carmaker said rising commodity prices and a strengthening euro will damp earnings gains this year. Volkswagen also posted second-quarter earnings before interest and taxes of 3.17 billion euros ($4.6 billion). That fell short of the 3.26 billion-euro average estimate of 14 analysts surveyed by Bloomberg.

Peugeot, Finmeccanica Drop

Peugeot plunged 12 percent after France’s largest carmaker said its automotive unit may post a loss in the second half because of disruption from the Japanese earthquake in March and rising material costs.

Finmeccanica SpA, which produces commercial and military aircraft, tumbled 28 percent for the largest retreat in the Stoxx 600 this week. The company lowered its 2011 revenue prediction to 17.5 billion euros to 18 billion euros. Finmeccanica had forecast sales this year of 18.3 billion euros to 19 billion euros.

Alcatel-Lucent plunged 23 percent amid speculation that U.S. mobile phone companies will cut their spending in the second half.

Ryanair dropped 7.9 percent, its biggest weekly slump since January. The airline said first-quarter earnings were little changed at 139.3 million euros after higher fuel costs eroded gains from rising passenger numbers. That missed the average analyst estimate of 156.8 million euros, according to a Bloomberg survey.

--Editors: Will Hadfield, Andrew Rummer

To contact the reporter on this story: Conor Sullivan in London at csullivan39@bloomberg.net

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


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