European Stocks Slide as Fed Sees Risks to Economy; Rio Sinks

By Corinne Gretler - Sep 22, 2011 6:21 PM GMT+0700

European stocks tumbled the most in a month as the Federal Reserve signaled “significant downside risks” to the world’s largest economy and Moody’s Investors Service downgraded three U.S. banks. Asian shares and U.S. index futures fell.

Logitech International SA (LOGN), the world’s biggest maker of computer mice, plunged 13 percent after cutting its forecasts for the second time in two months. Rio Tinto Group, the world’s second-largest mining company, sank the most in more than two years as China’s manufacturing shrunk. LVMH Moet Hennessy Louis Vuitton SA and Burberry Group Plc led luxury stocks lower.

The benchmark Stoxx Europe 600 Index sank 4.4 percent to 215.42 at 12:19 p.m. in London, the biggest drop since Aug. 18. The gauge has declined 26 percent from this year’s high on Feb. 17 amid concern the global economic recovery is stalling and the region’s debt crisis is spreading. The MSCI Asia Pacific Index retreated 4.1 percent today and S&P 500 Index futures decreased 2.6 percent after the benchmark gauge for U.S. equities plunged 2.9 percent yesterday.

“To have a chance to resolve the European debt situation, we need world growth to remain robust,” said Jean-Paul Jeckelmann, chief investment officer at Banque Bonhote & Cie. in Neuchatel, Switzerland, who helps manage $1.4 billion in equities. “Any sign that this growth is at risk will shake markets. The word ‘significant’ used by the Fed is pretty strong and is contrasting with previous declarations that were much more constructive.”

Fed Plan

The Fed said it will replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs further amid “significant downside risks to the economic outlook, including strains in global financial markets.”

The central bank will buy securities with maturities of 6 to 30 years through June while selling an equal amount of debt maturing in three years or less, the Federal Open Market Committee said late yesterday after a two-day meeting. The action “should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the FOMC said.

The Fed’s “downbeat outlook for the economy left traders fleeing from risky assets,” Jonathan Sudaria, a trader at London Capital Group, said in e-mailed comments.

Moody’s downgraded the long-term credit ratings of Bank of America Corp. and Wells Fargo & Co., along with Citigroup Inc.’s short-term rating, saying U.S. support has become less likely if lenders get into financial trouble.

Greek Cuts

Greek Prime Minister George Papandreou’s government said it will accelerate budget cuts, targeting civil servants’ wages and pensioners to keep emergency loans flowing and avoid default, following two rounds of talks with the European Union and the International Monetary Fund. The policies were demanded by international lenders to ensure Greece reaches deficit-reduction targets in a 110 billion-euro ($151 billion) bailout and receive a payment due next month.

“A promise of accelerating budget cuts is another attempt at buying more time,” said Manish Singh, London-based head of investment at Crossbridge Capital, which has more than $2 billion under management. “More austerity will pile on that pain and be deeply unpopular. I wonder if a quick Greek default is not a better option than long, drawn-out uncertainty and then a default.”

Economic Data

China’s manufacturing may shrink for a third month in September, the longest contraction since 2009, after a preliminary index of purchasing managers showed measures of export orders and output declined. A report in Brussels showed that European services and manufacturing growth contracted for the first time in more than two years in September.

U.S. Labor Department data at 8:30 a.m. in Washington may show that initial jobless claims dropped to 420,000 from 428,000 a week ago, according to 43 economists surveyed by Bloomberg. Separately, the index of U.S. leading economic indicators probably climbed 0.1 percent in August after a 0.5 percent gain in July, according to the survey median.

Logitech fell 13 percent to 6.82 Swiss francs, the biggest decline since April. The company cut its sales and operating profit forecasts for the second time in two months after reassessing its business under Chairman Guerrino De Luca acting as chief executive officer.

Rio, BHP Billiton

Mining companies declined as copper fell to the lowest in almost a year. Rio Tinto and larger rival BHP Billiton Ltd. (BHP) sank 9.3 percent to 3,075 pence and 6.7 percent to 1,762 pence, respectively. Kenmare Resources Plc (KMR) decreased 8.9 percent to 45.90 euro cents while Kazakhmys Plc (KAZ), the biggest copper producer in Kazakhstan, dropped 9.4 percent to 875.50 pence. Antofagasta Plc (ANTO) fell 9.2 percent to 1,012 pence.

LVMH, the maker of Celine handbags and TAG Heuer watches, tumbled 6.7 percent to 7.60 euros. Burberry, the U.K.’s largest luxury-goods maker, retreated 9.5 percent to 1,366 pence, the biggest drop since April 2009.

Societe Generale SA, France’s second-largest bank by assets, slid 8 percent to 15.57 euros ands Lloyds Banking Group Plc (LLOY), Britain’s biggest mortgage lender, lost 7.9 percent to 33.32 pence.

Michel Barnier, the European Union’s financial-services commissioner, told Le Figaro in an interview that he can’t rule out the possibility that some European banks will need state aid. Barnier said in the interview that he doesn’t share the view of the International Monetary Fund on the capital needs of European banks. Any necessary refinancing should preferably be carried out with private money, he added.

EADS Slides

European Aeronautic Defence and Space Co. slumped 6.3 percent to 21.25 euros. BNP Paribas SA and Societe Generale (GLE) have stopped lending to aircraft purchasers because of difficulties in obtaining dollar refinancing, Les Echos reported, without citing anyone. Airbus SAS may be affected more than Boeing Co., which has easier access to credit in the U.S., according to the newspaper.

Bourbon SA (GBB), owner of the second-biggest fleet of supply and crew ships for the oil industry, slumped 7.8 percent to 17.94 euros as Bank of America Corp. said the growing liquidity concern around French banks “raises question marks” around financing for part of the European oil industry, adding that Bourboun is “heavily reliant on French banks financing for their fleet expansion program.”

Stada Arzneimittel AG (SAZ) plunged 11 percent to 16.75 euros, extending yesterday’s 19 percent plunge, after Sebastian Frericks, an analyst at Bankhaus Metzler, cut the shares to “sell” from “buy.” The company said yesterday it will have a one-time charge of about 97 million euros in the third quarter because of unpaid bills from Serbian drug wholesalers.

EasyJet Plc (EZJ), Europe’s second-biggest discount airline, rallied 7.1 percent to 334 pence as the company said it will pay a dividend of 9 pence a share for the fiscal year ending in September after raising its annual profit forecast.

To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net

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