European Stocks Drop on Recession Concerns; BHP, Xstrata Slide

By Adam Haigh

Oct. 15 (Bloomberg) -- European stocks fell for the first time in three days after U.S. retail sales declined more than forecast and Federal Reserve Bank of San Francisco President Janet Yellen said the world's largest economy is already in a recession.

BHP Billiton Ltd. and Xstrata Plc dropped more than 12 percent as copper retreated and concern deepened $2 trillion in funds for banks won't be enough to stave off a global economic contraction. Vedanta Resources Plc tumbled 15 percent as the global credit crisis threatened the purchase of Asarco LLC. ASML Holding NV sank 4.2 percent after the region's largest maker of semiconductor equipment forecast shipments that fell short of analysts' estimates.

The Dow Jones Stoxx 600 Index lost 3.4 percent to 224.33 at 2:32 p.m. in London, following the biggest two-day rally on record. Reports today showed U.S. retail sales dropped in September by the most in three years and manufacturing in the New York region sank to a record low.

``We don't have much of a rosy outlook in terms of global growth next year, that is what is worrying markets,'' said Christian Gattiker, Zurich-based head of equity research at Bank Julius Baer & Co., in a Bloomberg Television interview. ``We have much more to go in terms of earnings deterioration.'' Parent company Julius Baer Holding AG has about $328 billion.

National benchmark indexes slid in all 18 western European markets. The U.K.'s FTSE 100 lost 4.2 percent as Rio Tinto Group retreated. France's CAC 40 decreased 3.5 percent, led by Total SA as crude oil dropped below $76 a barrel. Germany's DAX declined 3.6 percent as Siemens AG tumbled.

Pessimism Soars

Pessimism on stocks soared to an all-time high as a growing conviction the global economy is in a recession spurred investors to shun commodity shares, a Merrill Lynch & Co. survey showed.

Confidence in the global economy plunged in October, according to the Bloomberg Professional Global Confidence Index. The measure fell to the lowest reading on record.

The Stoxx 600 has lost 38 percent this year as concern the seizure in credit markets will trigger a global recession erased $25 trillion in value from stocks worldwide. Financial firms reported $637 billion in losses and writedowns from mortgage- related investments since the beginning of 2007.


Two-Day Rally

The benchmark rallied 13 percent in the previous two days as governments and central banks worldwide announced bailouts and funding to unfreeze credit markets and prevent the collapse of the global banking system.

The Bush administration said yesterday it was investing $250 billion to purchase stakes in U.S. financial companies.

The injection in banks won't stop stock prices from falling because ``nobody'' believes the measure is sufficient, Japanese Prime Minister Taro Aso said in parliament, responding to a lawmaker's question about his plans to help limit the global crisis.

Money-market rates fell for a third day. The cost of borrowing in dollars for three months in London declined today to 4.55 percent from 4.64 percent, the British Bankers' Association said.

The dollar Libor-OIS spread, a gauge of demand for cash, narrowed 6 basis points to 333 basis points. That's still more than triple the level of 105 basis points on Sept. 15. The spread was 24 basis points on Jan. 24.

Weakening Outlook

``Recent financial developments and economic data make it clear that the outlook for the U.S. economy has weakened noticeably,'' Yellen said in her speech to the Silicon Valley Chapter of Financial Executives International.

The U.S. is already in a recession by most accounts, according to economists surveyed by Bloomberg News this month.

U.K. unemployment last month rose to the highest level in almost two years, the Office for National Statistics said today. Claims for jobless benefits increased 31,800 to 939,900, the highest since November 2006.

BHP Billiton, the world's largest mining company, declined 12 percent to 948.5 pence. Xstrata, the fourth-biggest copper producer, sank 17 percent to 1,095 pence.

Copper, lead, tin and nickel prices slid on the London Metals Exchange.

Rio Tinto Group, battling a $86 billion takeover bid from BHP Billiton, may delay the planned sale this year of $10 billion of assets because of the global financial crisis. The shares lost 13 percent to 2,466 pence.

Vedanta

Vedanta fell 15 percent to 769.5 pence. Lawyers said the $2.6 billion purchase of bankrupt copper producer Asarco by Sterlite Industries (India) Ltd., a unit of London-based Vedanta, won't be completed after Sterlite told Asarco to cut its asking price.

The credit crisis has increased borrowing costs as declining metal prices hurt the outlook for earnings, thwarting acquisitions and expansions.

Total, Europe's third largest oil producer, lost 3.1 percent to 38.03 euros as crude fell as much as $3.66, or 4.7 percent, to $74.97 on the New York Mercantile Exchange.

Analysts slashed earnings estimates this year as concern mounted that the global economy is slowing. Profit at companies in the Stoxx 600 are forecast to drop 3.6 percent this year, compared with 11 percent growth forecast at the end of last year, based on data compiled by Bloomberg. Earnings for S&P 500 companies will decline 3.1 percent in 2008, compared with a 15 percent increase predicted in December 2007, the data show.

``Recession beckons,'' David Buik said in a Bloomberg Television interview in London. ``There is a realization that the relief rally is over.''

Valuations

The Stoxx 600 was valued at 8.5 times earnings of companies in the index last week, the cheapest on record, and climbed to 9.7 times profit yesterday. The MSCI World Index traded at 11 times the earnings of its 1,730 companies on Oct. 10, the lowest on record, and closed yesterday at 12.2 times profit.

The S&P 500, the benchmark for American equities, ended last week valued at 17.2 times earnings, also the lowest in more than a year. The index jumped 11.6 percent on Oct. 13, pushing its price-to-earnings ratio to 19.2.

ASML sank 4.2 percent to 10.45 euros. Europe's largest maker of semiconductor equipment said third-quarter profit fell 56 percent on lower machine sales after chipmakers delayed expansion plans.

Siemens and Lafarge SA led declines among companies that made more than one-fifth of sales in the U.S. last year. Siemens, Europe's largest engineering company, declined 8.4 percent to 49.34 euros. Lafarge, the world's biggest cement company, dropped 11 percent to 58.50 euros.

KBC Group NV slumped 16 percent to 39.46 euros after reporting a net loss in the third quarter as it wrote down the value of collateralized debt obligations..

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net