Bloomberg News

European Stocks Drop as Draghi Sees Risks; Banks Retreat

July 05, 2012

European stocks retreated as European Central Bank President Mario Draghi said downside risks to the economy remain, offsetting monetary policy easing by countries from China to the U.K.

Spanish and Italian banks fell as bond yields climbed after the ECB refrained from announcing new measures to support growth. Volkswagen AG (VOW) jumped 5.1 percent after reaching an agreement with Germany’s tax authorities to buy the 50.1 stake in Porsche SE that it doesn’t already own. GKN Plc jumped 13 percent after buying Volvo AB (VOLVB)’s aircraft-engine unit.

The Stoxx Europe 600 Index (SXXP) lost 0.2 percent to 256.93 at the close in London after earlier falling as much as 0.8 percent and rising as much as 0.8 percent. The equity benchmark is still headed for a fifth-straight week of gains, which would be its longest winning streak since January. The Stoxx 600 has climbed 9.9 percent from this year’s low on June 4 amid speculation that central banks would ease monetary policy.

“A lot of today’s announcements were largely anticipated,” said Edmund Shing, an equity strategist at Barclays Capital in London. “You could argue that over the last few days, markets have been pricing in increasing expectation of central-bank action.”

The ECB cut interest rates to a record low and said it won’t pay anything on overnight deposits. The central bank reduced its main refinancing rate to 0.75 percent from 1 percent and cut its deposit rate to zero from 0.25 percent.

Draghi, the central bank’s president, said some “downside risks to the euro-area economic outlook have materialized. The main downside risks relate to weaker-than-expected economic activity.”

Rates Decision

The Stoxx 600 earlier climbed as China cut its interest rates for the second time in a month and allowed banks to offer bigger discounts on their lending costs. The one-year lending rate will fall by 31 basis points and the one-year deposit rate will drop by 25 basis points with effect from tomorrow, the People’s Bank of China said. Lenders can offer 30 percent discounts on loans, the central bank said.

In the U.K, the Bank of England restarted bond buying two months after halting its asset-purchase program. The Monetary Policy Committee led by Governor Mervyn King raised its target by 50 billion pounds ($78 billion) to 375 billion pounds, matching the estimates of the majority of economists in a Bloomberg News survey.

National benchmark indexes fell in 14 of the 18 western- European markets. Germany’s DAX declined 0.5 percent and France’s CAC 40 retreated 1.2 percent. The U.K.’s FTSE 100 gained 0.1 percent.

Lenders Retreat

European banks posted the biggest slide of the 19 industries in the Stoxx 600 as Spanish and Italian bonds dropped after the ECB refrained from announcing more measures to cap borrowing costs in so-called peripheral nations. Spanish securities also declined after the nation’s borrowing costs increased at a debt sale today.

UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), Italy’s largest banks, slumped 5.1 percent to 2.81 euros and 4.4 percent to 1.04 euros, respectively. Italy’s 10-year government bonds extended their decline, pushing the yield on the securities above 6 percent earlier today. Yields on two-year notes advanced 27 basis points to 3.70 percent.

In Spain, Banco Bilbao Vizcaya Argentaria SA (BBVA) plunged 4.8 percent to 5.46 euros and Banco Santander SA (SAN), the country’s largest lender, fell 3.9 percent to 5.10 euros.

Volkswagen Gains

VW climbed 5.1 percent to 134.50 euros after Europe’s largest carmaker agreed to buy the controlling stake in Porsche’s automotive business for 4.46 billion euros ($5.5 billion), ending a seven-year takeover saga that has divided two of Germany’s most powerful families.

The transaction enables VW to fully incorporate Porsche’s automotive business into its stable of brands. The cash deal has an equity value of 3.88 billion euros and also includes what Porsche’s holding company would have received in dividend payments and half of the forecast synergies from the combination. Porsche slipped 1.2 percent to 41.46 euros.

GKN (GKN) rallied 13 percent to 211 pence, its biggest rally in more than three years. The British maker of parts for Airbus SAS airplanes agreed to buy the Volvo unit for 633 million pounds. GKN said it will raise 140 million pounds in a share sale to help pay for the purchase. For Volvo, the deal marks its biggest structural shift since the company split off its car unit in 1999. The shares slid 0.4 percent to 81.25 kronor.

Robert Walters Plc (RWA) led a selloff by U.K. recruitment companies, tumbling 6.9 percent to 194.5 pence. The business reported a 3 percent decline in second-quarter net fee income, missing some analysts’ estimates. Shore Capital had predicted total net fee income to increase 11.1 percent.

Michael Page International Plc (MPI) dropped 4.5 percent to 363 pence after Bank of America Corp. reduced its earnings-per-share estimate for the company, citing the risk of a relative derating. Hays Plc (HAS) slid 3.5 percent to 73.7 pence, even as the brokerage reiterated its buy recommendation.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net

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


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