European Stocks Retreat as French Bond Yields Surge; Banks Fall

European stocks dropped, erasing earlier gains, as a surge in French borrowing costs added to concern the region’s debt crisis is spreading.

Credit Agricole SA (ACA) slid 2.3 percent after France’s third- largest bank reported a drop in profit. Vedanta Resources Plc (VED) led a retreat in mining companies, falling 9.5 percent. Air France-KLM (AF) Group lost 5 percent after forecasting a full-year loss.

The benchmark Stoxx Europe 600 Index lost 0.4 percent to 235.35 at the close in London. The gauge earlier rose as much as 0.8 percent after Italy met its fund-raising target in a Treasury bills auction and the European Central Bank was said to be buying the nation’s bonds, driving down yields.

“This volatility is deterring investment,” said Neil Dwane, chief investment officer at Allianz Global Investors RCM unit on Bloomberg Television. “It’s deterring people from making rational investment choices. Unfortunately with what is going on in Europe, we are no clearer to a resolution, so it’s going to last a little longer.”

Stocks tumbled yesterday after Italian borrowing costs surged to euro-era records. Italy’s 10-year bond yield yesterday closed at 7.25 percent, near levels that prompted Greece, Ireland and Portugal to seek bailouts.

French 10-year bonds extended their declines today, sending the yield 20 basis points higher to 3.40 percent. Sean Egan, president and founding principal of Egan-Jones Ratings Co., told Bloomberg Radio the nation’s sovereign-debt rating is “probably headed south.”

The difference in yield with similar-maturity benchmark German bunds increased 18 basis points to 166 basis points, the most since the euro was introduced in 1999.

National benchmark indexes declined in 15 of the 18 western European markets today. France’s CAC 40 and the U.K.’s FTSE 100 both slid 0.3 percent, while Germany’s DAX rose 0.7 percent.

Italian Auction

In Italy, the FTSE MIB Index climbed 1 percent as the ECB was said buy Italian bonds, according to five people familiar with the transactions. The country also raised 5 billion euros ($6.8 billion) by selling 366-day bills at an average yield of 6.087 percent, the highest since September 1997.

Credit Agricole fell 2.3 percent to 4.90 euros. The bank reported a 65 percent drop in third-quarter profit to 258 million euros as writedowns on Greek debt crimped earnings. That missed the average analyst estimate of 552 million euros according to a Bloomberg survey.

Copper Tumbles

Vedanta Resources slid 9.5 percent to 1,131 pence after the largest copper producer in India reported a 92 percent drop in first-half profit to $27.8 million on foreign-exchange losses. The shares also fell as copper tumbled in London.

Antofagasta Plc (ANTO) declined 2.2 percent to 1,159 pence, Kazakhmys Plc retreated 1.7 percent to 907.5 pence and Xstrata Plc slid 1.7 percent to 1,003 pence.

Air France-KLM lost 5 percent to 4.62 euros after Europe’s biggest airline reported a 31 percent drop in quarterly profit and said it expects to post a full-year loss as fuel costs surge and a sluggish economy weighs on ticket prices.

K+S AG retreated 4.7 percent to 42.40 euros as Europe’s largest producer of potash pared its outlook for sales and profit this year and the next as economic volatility prompts wholesalers to scale back orders.

European Aeronautic Defence and Space Co. paced advancing shares, climbing 5 percent to 20.97 euros after third-quarter profit surged to 312 million euros from 13 million euros and the German government agreed to buy a 7.5 percent stake in the company from Daimler AG. (DAI) The maker of Mercedes-Benz cars lost 1.2 percent to 33.16 euros.

Natixis climbed 3.8 percent to 2.12 euros after reporting a 13 percent increase in third-quarter profit as a one-time gain on its own debt helped offset a slump in capital-markets revenue. Societe Generale SA raised its recommendation on the shares to “buy” from “sell.”

Anglo American Plc gained 1.3 percent to 2,383.5 pence after selling a 24.5 percent stake in its Chilean copper unit to Mitsubishi Corp. for $5.39 billion.

To contact the reporters on this story: Peter Levring in Copenhagen at plevring1@bloomberg.net; 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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