European Stocks Slide as Italy Bond Yields Climb to Record; HSBC Retreats

By Adria Cimino - Nov 9, 2011 10:11 PM GMT+0700

European stocks dropped for the third day in four after the spread between Italian and German bond yields widened to the most since the introduction of the euro and Italy’s credit-default swaps jumped to a record.

HSBC Holdings Plc (HSBA), Europe’s largest bank, retreated 6 percent. Dexia SA (DEXB) slumped 12 percent as the lender said its shareholder equity shrank because the Belgian government nationalized its unit in the country. Deutsche Post AG (DPW), Europe’s biggest postal service, jumped 4.6 percent after raising its full-year forecast.

The Stoxx Europe 600 Index fell 2 percent to 235.63 at 3:10 p.m. in London. Stocks earlier climbed as much as 1 percent after Italian Prime Minister Silvio Berlusconi offered to resign. The benchmark measure has still rallied 9.7 percent from this year’s low on Sept. 22 as investors speculated that the euro area would protect the economies of Italy and Spain from the sovereign-debt crisis.

“This is a negative spiral in terms of Italian debt,” said Yves Maillot, head of investments at Robeco Gestions SA in Paris, which oversees $6.8 billion. “We already were in a perilous situation. The level of debt in Italy is a very, very big problem. In spite of the good news of changes in Italian leadership, the problem is deeper.”

National benchmark indexes fell in all of the 18 western European markets. France’s CAC 40 Index sank 2.5 percent. Germany’s DAX Index retreated 2.4 percent. The U.K.’s FTSE 100 Index lost 2.2 percent.

Italian Bond Yields

Italian bonds tumbled, pushing two-, five-, 10- and 30-year yields to euro-era records. The 10-year notes underperformed similar-maturity benchmark German bunds, driving the difference in yield between the securities to 500 basis points for the first time since before the euro was introduced in 1999. The spread widened to 501 basis points, or 5.01 percentage points.

Italy’s two-year notes slid, pushing the yield on the securities above the rate on 10-year bonds. The 10-year note yield climbed to 7.35 percent, a euro-era record.

The cost of insuring against default on the country’s sovereign bonds jumped 38 basis points to a record 562, according to CMA. That exceeded the previous record of 534 set on Sept. 22.

The cost to protect against losses in European stocks compared with U.S. stocks rose to the highest level since July. Implied volatility for Euro Stoxx 50 Index options expiring in three months rose to 1.36 times the measure for S&P 500 Index options. That was the highest ratio since July 20, according to data compiled by Bloomberg.

Austerity Measures

Berlusconi last night said he will step down as soon as parliament passes austerity measures. He had pledged to cut spending in a bid to convince investors that Italy can manage the euro area’s second-largest debt. The government has yet to write the austerity bill, said Mario Baldassarri, head of the Senate Finance Committee.

LCH.Clearnet Ltd. increased the extra deposit it demands from clients to trade all Italian government bonds and index- linked securities.

In Greece, Prime Minister George Papandreou’s talks on forming an interim government to avert the economy’s collapse dragged into a third day as a near-agreement with the biggest opposition party stalled on European Union demands for written commitments. The makeup of Greece’s new government is to be announced today, the Associated Press reported, citing a government official who it did not name.

Chinese Inflation Slows

China’s inflation slowed by the most in almost three years, giving officials more room to support growth as industrial production cools, a report today showed. Consumer prices rose 5.5 percent in October from a year earlier, the statistics bureau said. The measure declined 0.6 percentage points from September, its biggest slide since February 2009.

A German panel said it sees growth slowing to 0.9 percent next year because of the debt crisis.

HSBC dropped 6 percent to 505.4 pence, contributing the most to the Stoxx 600’s slide. The bank said pretax profit at its investment bank led by Samir Assaf fell to about $1 billion in the third quarter from a year-earlier. Bad-loan provisions increased to $3.89 billion from $3.15 billion, mainly related to its U.S. unit, the bank said.

Bank shares fell 4.4 percent, among the biggest drops of the 19 industry groups in the Stoxx 600, as Greek and Italian lenders slid. Piraeus Bank SA (TPEIR) retreated 7.4 percent to 25 euro cents, while Banca Popolare dell’Emilia Romagna Scrl (BPE) lost 5.6 percent to 5.52 euros. Alpha Bank AE (ALPHA) sank 9 percent to 1.11 euros.

Dexia, Mediaset Slide

Dexia, the lender being broken up after running out of short-term funding, plunged 12 percent to 36.7 euro cents. The bank said shareholder equity shrank 84 percent after the nationalization of its Belgian bank unit and declines in the value of government bond holdings.

Mediaset SpA (MS), the broadcaster controlled by Berlusconi, tumbled 9.7 percent to 2.27 euros after the premier offered to resign once parliament approves stability measures.

Admiral Group sank 26 percent to 887 pence for the biggest decline on the Stoxx 600 and the shares’ largest retreat since 2004. The U.K. car insurer that owns the confused.com website said full-year pretax profit will be toward the lower end of analysts’ estimates.

Legrand SA (LR) sank 4.5 percent to 24.05 euros. KKR & Co. and Wendel SA completed the sale of 24.3 million shares in the world’s largest maker of wiring devices at 24 euros apiece, the companies said.

Deutsche Post, CGGVeritas

Deutsche Post rallied 4.6 percent to 11.19 euros. The company lifted its full-year forecast as increasing express shipments in Asia and parcel volume from Internet retailing boosted third-quarter earnings. Earnings before interest and taxes in 2011 will exceed 2.4 billion euros, the company said. That compared with an earlier prediction for Ebit at the upper end of a 2.2 billion-euro to 2.4 billion-euro range.

CGGVeritas added 4.7 percent to 17.02 euros. The company reported third-quarter net income of $41 million and said it remains “confident” of achieving its full-year objectives. The seismic surveyor made a loss of $33 million in the year-earlier period.

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net

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