Bloomberg News

European Stocks Slide 10% From 2011 High as Debt Crisis Spreads

August 01, 2011

Aug. 2 (Bloomberg) -- European stocks dropped 10 percent from this year’s high, becoming the first major region to enter a so-called correction, as falling Spanish and Italian bonds showed the debt crisis is spreading and U.S. manufacturing trailed forecasts.

Banks, insurers and technology companies led the decline in the benchmark Stoxx Europe 600 Index from a 2 1/2-year high on Feb. 17, driving the measure to a 2011 loss of 5 percent. Every industry decreased more than 17 percent, according to data compiled by Bloomberg. UniCredit SpA, Italy’s largest bank, plunged 40 percent in the period and Commerzbank AG, Germany’s second-largest lender, tumbled 47 percent.

The Stoxx 600 slid 1.2 percent to 262.02 yesterday. That was the lowest level in eight months and extended the drop from the latest peak to 10 percent, a retreat known as a correction. The MSCI Asia Pacific Index has slipped 1.3 percent from its high in May while the Standard & Poor’s 500 Index has declined 5.6 percent from its April peak amid concern the U.S. may lose its top credit rating as lawmakers wrangle over an increase to the nation’s debt ceiling.

“There are worries about debt in Europe and in the U.S., and that remains an element that weighs heavily on the market,” said Guillaume Duchesne, an equity strategist at BGL BNP Paribas SA in Luxembourg. “All that plays very unfavorably on sentiment. In Europe, there is pressure on companies’ margins. The situation remains fragile.”

Earnings Misses

More European companies have missed analysts’ estimates since July 11 than in any earnings season in at least five years. About 52 percent of companies in the Stoxx 600 have posted earnings that fell short of projections, according to data compiled by Bloomberg, compared with 78 percent of S&P 500 companies that have exceeded forecasts.

The Institute for Supply Management’s U.S. factory index slumped to 50.9, the lowest since July 2009, from 55.3 a month earlier, the Tempe, Arizona-based group said yesterday. Figures less than 50 signal contraction. A report last week showed the world’s largest economy grew less than forecast in the second quarter and almost stalled in the prior period.

Republican leaders voiced optimism yesterday that Congress will pass a compromise with President Barack Obama to raise the U.S. debt limit by at least $2.1 trillion by today’s deadline. Even so, both S&P and Moody’s Investors Service are weighing whether to cut the nation’s credit rating. The political impasse boosted to 50 percent the chance that S&P will downgrade the U.S. from AAA within three months, the company said last month.

‘Biggest Threat’

“Observers tend to believe that even though a downgrade of the U.S. credit rating is possible, it will not be the end of the world as there is no other credible alternative,” said Stephane Ekolo, chief European strategist at Market Securities in London. “Therefore, it is not unsurprising that investors are looking into euro-zone debt believing this is where the biggest threat remains.”

In April, Portugal followed Greece and Ireland to become the third euro-region nation to seek a rescue from the European Union. S&P has reduced its rating on Greece to CC, two steps above default, from BB+ on Feb. 17, and Moody’s has cut its stance to Ca from Ba1.

Euro-area leaders were forced to announce 159 billion euros ($227 billion) in additional aid for Greece on July 21 and cajoled bondholders into footing part of the bill. The yield on 10-year Italian bonds had surged to a euro-era record of 6.027 percent three days earlier.

The valuation of the Stoxx 600 has fallen to 10.7 times its companies’ forecast earnings, from 11.5 times at the measure’s peak this year, Bloomberg data show. That’s near the cheapest since April 2009.

Banks Drop

The Stoxx 600 Banks Index led the broader market lower, plunging 26 percent since Feb. 17. UniCredit retreated 40 percent, while Intesa Sanpaolo SpA, the Italy’s second-biggest lender, decreased 39 percent. Commerzbank tumbled 47 percent and Deutsche Bank AG declined 23 percent.

Three Italian lenders lost more than half their market value. Banca Popolare di Milano Scarl tumbled 54 percent, Banco Popolare SC sank 55 percent and Unione di Banche Italiane ScpA plummeted 58 percent.

In Greece, EFG Eurobank Ergasias SA slumped 41 percent and National Bank of Greece SA slid 39 percent.

The Stoxx Insurance 600 Index sank 17 percent as all but one of its 33 constituents retreated. Aegon NV slumped 30 percent, while Assicurazioni Generali SpA, Europe’s fourth- largest insurer by sales, tumbled 24 percent. ING Groep NV, the biggest Dutch financial-services company, and Munich Re, the world’s largest reinsurer, both decreased 19 percent.

Technology Shares Tumble

The Stoxx 600 Technology Index slumped 17 percent as Alcatel-Lucent SA, France’s biggest telecommunications equipment maker, declined 28 percent. Logitech International SA, the world’s largest maker of computer mice, sank 59 percent as the company posted a first-quarter loss that was wider than analysts had estimated.

The Stoxx 600 Travel & Leisure Index plunged 13 percent as Thomas Cook Group Plc lost 67 percent, the biggest drop of any company on the Stoxx 600 since the gauge’s peak this year.

Europe’s second-largest tour operator cut its full-year profit forecast on July 12, predicting that its operating profit in the year ending in September will fall to 320 million pounds ($521 million) from 362 million pounds in 2010. Analysts had estimated operating profit of 382 million pounds.

--With assistance from Julie Cruz in Frankfurt and Alexis Xydias and Adam Haigh in London. Editors: Will Hadfield, Andrew Rummer

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net

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


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