European stocks tumbled, with the Stoxx Europe 600 Index posting its biggest two-day drop since March 2009, as investors speculated that support for bailing out Europe’s indebted nations may fade.
Deutsche Bank AG and Credit Suisse Group AG both tumbled more than 8 percent after the U.S. sued 17 lenders to recoup $196 billion and the cost of insuring against default in Europe surge to a record. Clariant AG led chemical makers lower, tumbling 16 percent after the company cut this year’s earnings forecasts.
The Stoxx Europe 600 Index lost 4 percent to 223.86 at the 4:30 p.m. close in London as all 19 industry groups declined. Standard & Poor’s 500 Index futures retreated 2 percent. U.S. stock markets are closed today for the Labor Day holiday.
“Europe is being hammered on the debt crisis,” said Henrik Drusebjerg, senior strategist at Nordea Bank AB in Copenhagen. “It’s Merkel getting slapped at the regional election yesterday and it’s the Finns demanding collateral for the money they’re wiring to Greece.”
The benchmark Stoxx 600 plunged 2.4 percent on Sept. 2, 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.
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.”
The cost of insuring against default on European sovereign and financial debt surged to records on concern the region’s debt crisis is worsening.
The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose 15 basis points to 325 while the Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers soared 24 basis points to 270, according to JPMorgan Chase & Co. Both gauges are at all-time highs based on closing prices.
European Markets Tumble
National benchmark indexes dropped in all 18 western European markets. Germany’s DAX Index tumbled 5.3 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 3.6 percent and France’s CAC 40 Index lost 4.7 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 Larry 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 8.9 percent to 23.72 euros, Credit Suisse plunged 8.1 percent to 19.99 Swiss francs and Royal Bank of Scotland Group Plc declined 12 percent to 21.8 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, $4.9 billion from Barclays Plc and $1.3 billion from Societe Generale SA. The FHFA sued UBS AG in July. HSBC slid 3.8 percent to 504.5 pence, Barclays lost 6.7 percent to 154.2 pence and Societe Generale sank 8.6 percent to 20.25 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 16 percent to 6.95 francs, its biggest drop since at least 1995, 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 8.2 percent to 46.66 euros, Germany’s Wacker Chemie AG dropped 7.3 percent to 85.72 euros and Amsterdam-based Akzo Nobel NV sank 6.7 percent to 32.16 euros.
Berkeley Group Holdings Plc paced advancing shares, surging 4.8 percent to 1,236 pence. The U.K.’s largest homebuilder by market value said it may reach a goal of doubling pretax profit two years earlier than it had planned as sales improve. The company said in May last year that it aimed to double profit within five years.
(c) The Washington Post and Bloomberg News.