European stocks dropped after an election loss for German Chancellor Angela Merkel’s party spurred concern that support for bailing out Europe’s indebted nations may fade. U.S. futures and Asian shares also declined.
Deutsche Bank AG (DBK) and Credit Suisse Group AG (CSGN) both tumbled at least 8 percent after the U.S. sued 17 lenders to recoup $196 billion. Clariant AG (CLN) led chemical makers lower, tumbling 15 percent after the company cut this year’s earnings forecasts. Berkeley Group Holdings Plc (BKG) jumped 3.6 percent after saying it will reach a profit goal two years earlier.
The Stoxx Europe 600 Index lost 3.3 percent to 225.46 at 2:31 p.m. in London as all 19 industry groups declined. Standard & Poor’s 500 Index futures retreated 1.4 percent. U.S. stock markets are closed today for the Labor Day holiday. The MSCI Asia Pacific Index tumbled 2.7 percent.
“Significant euro zone political event risk is likely to keep investors on guard,” said UBS AG (UBSN)’s Larry Hatheway in a report to clients. “Perceptions regarding the economic outlook are unlikely to improve quickly after the most recent bout of weak data.”
The benchmark Stoxx 600 plunged 2.4 percent on Sept. 2, its biggest selloff since Aug. 18, after a worse-than-forecast U.S. jobs report added to concern that America’s economic recovery is stalling. The gauge lost 10 percent last month amid concern that global economic growth is slowing as Europe’s sovereign-debt crisis spreads.
German Election
Merkel’s party yesterday suffered its fifth election loss this year after the Chancellor failed to sway voters in her home state with a campaign based on her handling of the euro area’s debt crisis.
The Social Democrats, the main opposition party nationally, took 35.7 percent to win yesterday’s election in Mecklenburg- Western Pomerania, while Merkel’s Christian Democratic Union had 23.1 percent, its worst result since voting began in 1990 after reunification that year between West Germany and the former communist East Germany.
Merkel’s election result “shows voters’ discontent with the way she has been handling the debt crisis,” said Chris Weston, an institutional trader at IG Markets in Melbourne in a telephone interview. “There is a confluence of negative factors which are detracting from the investment case for equities.”
European sovereign-debt risk rose to a record based on closing prices, according to traders of credit-default swaps. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose 10 basis points to 320. An increase signals deteriorating perceptions of credit quality.
European Markets Slide
National benchmark indexes dropped in all 18 western European markets. Germany’s DAX Index (DAX) fell 3.9 percent, sending the gauge’s companies to their cheapest-ever valuation as a multiple of estimated earnings, according to Bloomberg data that began in 2006. The U.K.’s FTSE 100 Index dropped 2.3 percent and France’s CAC 40 Index lost 4 percent.
UBS initiated an “underweight” recommendation on global equities in a report dated Sept. 2, saying risk assets have come under pressure from weak data and a re-escalation in Europe’s sovereign-debt crisis.
“Developments suggest that rising risk premiums will push global equities lower in the period immediately ahead,” wrote Hatheway, chief economist at UBS. “The circuit breaker lies with policy and politics.”
European efforts to contain the region’s debt crisis risk unraveling as individual nations’ demands for collateral, Greece’s deteriorating economic predicament and wavering commitment to austerity packages from euro members such as Italy throw any recovery in doubt.
Finland Seeks Compromise
Finland’s Prime Minister Jyrki Katainen said the country will increase its efforts to find a compromise with Europe on its demand for collateral for loans to Greece.
Deutsche Bank tumbled 8.3 percent to 23.86 euros, Credit Suisse plunged 8 percent to 20.01 Swiss francs and Royal Bank of Scotland Group Plc (RBS) declined 10 percent to 22.3 pence after the lenders were among 17 to be sued by the U.S. to recoup money spent on mortgage-backed securities bought by Fannie Mae and Freddie Mac.
The Federal Housing Finance Agency, on behalf of Fannie Mae and Freddie Mac, filed the lawsuits in New York state and federal courts and in federal court in Connecticut. The FHFA accused the banks of misleading Fannie Mae and Freddie Mac about the soundness of the mortgages underlying the securities.
HSBC, Barclays, SocGen
Among European lenders, the FHFA claimed Fannie Mae and Freddie Mac bought $14.2 billion from Deutsche Bank, $14.1 billion from Credit Suisse, $30.4 billion from RBS, $6.2 billion from HSBC Holdings Plc (HSBA), $4.9 billion from Barclays Plc (BARC) and $1.3 billion from Societe Generale (GLE) SA. The FHFA sued UBS AG in July. HSBC slid 3 percent to 509 pence, Barclays lost 6.3 percent to 154.8 pence and Societe Generale fell 8.7 percent to 20.24 euros.
Banks also fell as the premium they pay to borrow in dollars for three months through the swaps markets climbed to the most since December 2008, a sign that Europe’s lenders may be struggling to get funding.
The cost of converting euro-based payments into dollars, as measured by the three-month cross-currency basis swap, fell 4.8 basis points to 95 basis points below the euro interbank offered rate in London, indicating a higher premium to buy the greenback, Bloomberg data showed.
Clariant Shares Sink
Clariant plunged 15 percent to 7.04 francs, heading for its biggest drop since 2003, after the company cut its projections for sales and profitability this year after a slowdown in demand in some markets and a gain in the Swiss franc.
Clariant now forecasts full-year sales of 7 billion francs ($8.9 billion) to 7.2 billion francs, down from an earlier prediction of 7.8 billion francs to 8 billion francs. Clariant also lowered its projected margin range to 12.8 percent to 13.2 percent from an earlier 13.5 percent to 14.5 percent.
France’s Arkema retreated 8.3 percent to 46.63 euros, Germany’s Wacker Chemie AG dropped 7.3 percent to 85.76 euros and Amsterdam-based Akzo Nobel NV sank 6.1 percent to 32.38 euros.
Berkeley surged 3.6 percent to 1,221 pence after the U.K.’s largest homebuilder by market value said it may reach a goal of doubling pretax profit earlier than it had planned as sales improve. The company said in May last year that it aimed to double profit within five years.
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