Europe Stocks Drop to Eight-Month Low on U.S. Manufacturing Data

European stocks dropped to an eight- month low after a report showed U.S. manufacturing expanded at the slowest pace in two years as lawmakers prepared to vote on a proposal to raise the nation’s debt limit.

Italy’s Intesa Sanpaolo SpA (ISP) led banks lower. Ferrovial SA paced a decline in construction shares, losing 4.5 percent. Veolia Environnement SA, the world’s biggest water utility, slumped to the lowest level in eight years. Outotec Oyj (OTE1V) sank 10 percent after Danske Bank A/S downgraded the Finnish company.

The Stoxx Europe 600 Index dropped 1.2 percent to 262.02 at the 4:30 p.m. close in London after earlier rallying as much as 1.2 percent. The measure has tumbled 10 percent from this year’s high in February amid speculation the European debt crisis is spreading and concern that Republicans and Democrats will fail to agree on a deal to raise the U.S. debt ceiling before tomorrow’s deadline. A drop of that size from the most recent peak is known as a correction by analysts.

“Macroeconomic data are bad and company earnings aren’t good either,” said Jacques-Pascal Porta, who helps oversee $400 million at Paris-based investment firm Ofi Gestion Privee. “The agreement on the U.S. debt ceiling itself isn’t that great and the risk that the U.S. may lose its AAA rating is the Sword of Damocles hanging over the markets.”

Profits Trail

Profits at European companies are trailing estimates by the most in at least five years, dragged down by manufacturing shares that had been forecast to lead a rally in the second half of the year. About 52 percent of companies in the Stoxx 600 that have reported earnings since July 11 missed analysts’ projections, data compiled by Bloomberg show.

Manufacturing in the world’s largest economy expanded in July at the slowest pace since 2009 as new orders shrank and production eased. The Institute for Supply Management’s U.S. factory index fell to 50.9 from 55.3 in June. Economists had projected a drop to 54.5, according to the median forecast in a Bloomberg survey. Figures greater than 50 signal expansion.

Stocks in Europe initially rallied after President Barack Obama said U.S. lawmakers had reached agreement on raising the nation’s debt limit. The House planned to vote on the proposal today and the Senate may follow.

Both Standard & Poor’s and Moody’s Investors Service are weighing whether to cut the U.S. credit rating. The debt-ceiling impasse boosted to 50 percent the chance that S&P will downgrade the U.S. from AAA within three months, the ratings company said last month.

‘Biggest Threat’

A downgrade of U.S. credit rating “will not be the end of the world as there is no other credible alternative as to risk free debt,” said Stephane Ekolo, chief European strategist at Market Securities in London. “Therefore, it is not unsurprising that investors are looking into euro-zone debt believing this is where the biggest threat remains.”

Italian and Spanish bonds dropped, reversing an earlier advance. The yield on 10-year Italian bonds rose 14 basis points to 6.01 percent and yields on similar-maturity Spanish debt climbed 11 basis points to 6.19 percent.

National benchmark indexes dropped in all 16 western European markets that were open today. The U.K.’s FTSE 100 slid 0.7 percent, Germany’s DAX dropped 2.9 percent and France’s CAC 40 declined 2.3 percent. Spain’s IBEX 35 tumbled 3.2 percent and Italy’s FTSE MIB fell 3.9 percent to the lowest level since April 2009.

Banks Drop

Italian and Spanish banks led the benchmark Stoxx 600 lower amid concern the debt crisis may spread beyond Greece to Spain and Italy. The International Monetary Fund warned last week that Spain was still in the “danger zone” and must keep up momentum in restructuring its economy to stave off contagion.

Intesa Sanpaolo, Italy’s second-biggest lender, dropped 7.9 percent to 1.49 euros in Milan while UBI Banca SpA slid 7.9 percent to 3.09 euros. Banco Santander SA (SAN) retreated 3.8 percent to 6.94 euros in Madrid while Banco Popular Espanol SA lost 5 percent to 3.43 euros.

Spanish builders also retreated, led by Ferrovial, which fell 4.5 percent to 8.50 euros and Fomento de Construcciones & Contratas SA, which lost 4.3 percent to 18.35 euros.

Spain’s opposition People’s Party pledged to restore investor trust in the euro area’s fourth-biggest economy by imposing more spending cuts if it wins early elections in November as polls suggest it will.

Veolia Environment slid 5.3 percent to 14.97 euros, the lowest price since April 2003. Utility shares plummeted 2.5 percent today, the second-worst performance among 19 industry groups in the Stoxx 600.

Outotec, HSBC

Outotec sank 10 percent to 30.88 euros in Helsinki, its biggest drop since 2008, as the Finnish supplier of technology and services to mining companies was downgraded to “sell” from “hold” at Danske Bank.

HSBC Holdings Plc (HSBA) limited losses in the Stoxx 600, rising 2.2 percent to 607.5 pence. Europe’s biggest bank reported first-half earnings of $9.22 billion, beating analyst estimates of $7.82 billion, and said it will cut 30,000 jobs as part of a plan to reduce costs by as much as $3.5 billion over the next two years.

To contact the reporters on this story: Sarah Jones in London at sjones35@bloomberg.net; Julie Cruz in Frankfurt at jcruz6@bloomberg.net

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

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