European Stocks Sink as Debt Concern Deepens; Ryanair Slumps

May 23, 2011, 12:12 PM EDT By Sarah Jones

May 23 (Bloomberg) -- European stocks dropped to a one- month low after Spain’s ruling party suffered its worst election defeat in 30 years and Standard & Poor’s warned it may downgrade Italy’s debt.

Banco Santander SA, Spain’s largest bank, and Italy’s Intesa Sanpaolo SpA led a selloff in financial shares, both falling more than 1.5 percent. Commerzbank AG plunged 5.3 percent after the German lender announced a 5.3 billion-euro ($7.4 billion) share sale. Airlines tumbled after Ryanair Holdings Plc reported earnings and a volcanic eruption in Iceland threatened to disrupt trans-Atlantic flights.

The benchmark Stoxx Europe 600 Index dropped 1.6 percent to 275.08 at the 4:30 p.m. close in London, erasing its gain for the year. The gauge fell last week after Greek 10-year bond yields climbed to a record and Fitch Ratings cut Greece’s credit rating to B+, four notches below investment grade.

“Whilst the euro-area outlook deteriorates, the general buoyancy of financial markets has also disappeared in the last few days,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “It seems this week will be pivotal to the immediate future of the structure of euro-zone debt, with announcements and further downgrades possible through the week.”

The Euro Stoxx 50 Index of shares in the euro zone retreated 1.9 percent to 2,799.38, for its biggest two-day drop since March.

Euro Declines

The euro touched a record low against the Swiss franc and reached its lowest in a week against the dollar after Spain’s Socialist Party suffered a defeat in local elections as voters punished Prime Minister Jose Luis Rodriguez Zapatero’s party for soaring unemployment and spending cuts.

The 17-nation currency also fell after S&P on May 20 cut Italy’s credit-rating outlook to negative from stable, citing slowing economic growth and “diminished” prospects for a reduction of government debt. Italy’s Treasury said in a statement from Rome that it will “intensify” structural changes in the economy and push ahead with measures to balance the budget by 2014.

Italy’s FTSE MIB Index tumbled 3.3 percent, the largest drop of the 18 western European benchmarks, as 27 companies including Eni SpA and Intesa Sanpaolo traded without the right to their latest dividend. Spain’s benchmark IBEX Index retreated 1.4 percent, while Ireland’s ISEQ Index lost 1.7 percent.

European Markets

National benchmark indexes retreated in all 18 western European markets. The U.K.’s FTSE 100 Index lost 1.9 percent and France’s CAC 40 Index dropped 2.1 percent, dragged lower by Total SA as the oil company traded without the right to its latest dividend. Germany’s DAX Index retreated 2 percent.

European services and manufacturing growth slowed more in May than economists had forecast, a report from London-based Markit Economic showed today, suggesting that the region’s economy is struggling to maintain momentum amid surging energy costs and tougher government austerity measures.

Santander declined 1.7 percent to 7.77 euros in Madrid. Intesa, Italy’s second-biggest bank, dropped 2.8 percent to 1.69 euros. Bank of Ireland Plc retreated 5.4 percent to 20.3 euro cents in Dublin.

Credit Agricole SA sank 3 percent to 10.53 euros after S&P downgraded the counterparty credit rating for France’s third- largest lender to A+/A-1 from AA-/A-1+, saying the bank has a “significant sensitivity” to Greece’s creditworthiness and economic prospects.

Commerzbank lost 5.3 percent to 3.74 euros in Frankfurt after announcing plans to raise capital by selling new shares to help repay state aid. Germany’s second-biggest bank will sell 2.44 billion new shares at 2.18 euros apiece. Shareholders will be allowed to subscribe to 10 new shares for every 11 already held from May 24 to June 6, the company said.

Icelandic Volcano

Ryanair retreated 5.3 percent to 3.36 euros as Europe’s biggest discount airline said it will cut capacity for the first time in its history next winter as higher fuel costs threaten to render swathes of the network unprofitable.

The airline said annual profit will be “similar” to last year’s amid slower growth in demand. The airline still reported a 26 percent jump in full-year adjusted profit after taxes to 401 million euros.

Airlines also retreated as Britain’s weather agency said that ash from the volcanic eruption that began on May 21 under Europe’s largest glacier, Vatnajokull, may reach the U.K. as early as tonight, threatening trans-Atlantic air traffic.

Predictive charts on the U.K. Met Office website show ash from the Grimsvotn volcano stretching south from Iceland as far as the western isles of Scotland by midnight tonight, mainly at lower altitudes.

Air France, EasyJet

Air France-KLM Group slumped 4.5 percent to 11.46 euros in Paris trading, while EasyJet Plc lost 4.9 percent to 345.1 pence. Lufthansa, Europe’s biggest airline by sales, sank 3.5 percent to 15.03 euros.

Anglo American Plc and Royal Dutch Shell Plc led a selloff in commodity producers as base metals fell in London and crude oil tumbled in New York. Anglo American declined 4.1 percent to 2,830.5 pence, Antofagasta Plc lost 3.9 percent to 1,160 pence and Shell dropped 2.3 percent to 2,095 pence.

Copper, Metals Slide

Copper dropped the most in two weeks on the London Metal Exchange as figures showed weaker manufacturing growth in China, the world’s biggest consumer of the metal. Crude oil fell after the dollar rose to a nine-week high against the euro.

British Land Co. declined 2.8 percent to 576 pence. The U.K.’s second-largest real-estate investment trust posted a 26 percent drop in full-year profit to 840 million pounds ($1.4 billion) after the company’s shopping centers and office buildings appreciated at a slower rate.

Ericsson AB lost 3 percent to 91.95 kronor after BofA Merrill Lynch Global Research lowered its recommendation to “underperform” from “neutral,” which said expectations for earnings in coming quarters may be too high.

Pandora A/S, the Danish maker of charm bracelets, extended last week’s drop, sinking 11 percent to 178 kroner. The stock fell 22 percent on May 19 after first-quarter sales missed most estimates, hurt by weakness in Australia and Germany.

--With assistance from Alexis Xydias in London. Editors: Will Hadfield, Andrew Rummer

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net

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

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