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Stocks in Europe Drop Most in Three Weeks Amid Impasse on U.S. Budget Cuts

European stocks dropped the most in three weeks amid signs U.S. lawmakers may fail to reach an agreement on budget cuts, raising the prospect the world’s largest economy could face another credit downgrade.

KBC Groep NV (KBC) led banks lower as dollar funding costs and bond yields climbed. Mining and energy companies dropped with metal and crude oil prices on signs of slowing growth in Asia. Carrefour SA (CA) slipped 3.2 percent after the retailer’s largest shareholders were said to consider replacing its chairman and chief executive officer.

The benchmark Stoxx Europe 600 Index sank 3.2 percent to 224.76 at the close, the gauge’s biggest retreat since Nov. 1. The Stoxx 600’s slump extended last week’s 3.7 percent selloff. Stocks tumbled around the world last week as the yields on Italian and Spanish bonds climbed, and the cost of insuring against losses on the nations’ debt rose.

“The U.S. budget situation is a further drag on sentiment,” said Paul Coffin, a fund manager at Fieldings Investment Management Ltd. in London. “The market is still being dominated by the European situation. The U.S. budget is probably secondary to the euro zone’s problems.”

The U.S. deficit-cutting congressional supercommittee will probably announce that it has failed to agree on $1.2 trillion of federal budget savings, a Democratic aide said in an e-mail.

Congressional Budget Office

The aide, who wasn’t authorized to discuss internal matters publicly and requested anonymity, said that it was highly unlikely that the talks could be salvaged. Today is the deadline for the Congressional Budget Office to receive a plan that it can analyze before the committee’s Nov. 23 target date for reaching an agreement. S&P downgraded the U.S. on Aug. 5 to AA+ from AAA.

This adds “more uncertainty into the markets,”said Jonathan Sudaria, a trader at London Capital Spreads, in an e- mail. Given that the reasoning for the last U.S. downgrade was the political inability to get anything done and the soaring debt burden, it would be highly logical to expect more U.S. downgrades.’’

In Spain, Mariano Rajoy won the biggest parliamentary majority in an election in almost 30 years, and told Spaniards to brace for difficult times as the nation fights to avoid being overwhelmed by the sovereign-debt crisis.

Spain’s Parliamentary Election

Rajoy’s People’s Party swept the ruling Socialists from power after eight years, winning 186 of the 350 seats in Parliament, compared with 110 for the ruling party’s candidate Alfredo Perez Rubalcaba.

National benchmark indexes retreated in all 18 markets in western Europe. France’s CAC 40 Index and Germany’s DAX Index lost 3.4 percent. The U.K.’s FTSE 100 Index dropped 2.6 percent. Greece’s ASE Index sank 3.7 percent as the country’s new Prime Minister Lucas Papademos met European Union President Herman Van Rompuy and European Commission President Jose Barroso in Brussels today.

KBC led bank shares lower, slumping 13 percent to 9.46 euros in Brussels, as the three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, widened for a sixth day and bond yields climbed in Spain, Italy and Belgium.

Commerzbank AG (CBK) plunged 6.8 percent to 1.36 euros, BNP Paribas (BNP) SA slid 4.3 percent to 26.85 euros and Barclays Plc (BARC) dropped 5.4 percent to 157.5 pence.

France’s Bond Yields

Shares also fell as Moody’s Investors Service warned that rising French bond yields increased the fiscal challenges facing the nation with “negative credit implications.” The rating company declined to comment on a report in Le Figaro newspaper that France’s AAA credit rating is at risk.

“We believe there is a high probability that a negative outlook will probably be assigned in coming weeks,” Citigroup Inc. economist Juergen Michels wrote in a report to clients dated today. “In the middle of October, Moody’s had announced that it would review France’s Aaa stable outlook within the next three months.”

Rio Tinto Group slid 5.9 percent to 3,083 pence and Total SA (FP) lost 2.9 percent to 36.02 euros, pacing gauges of mining and energy companies lower. Copper and oil fell for a third day as Japan’s exports dropped and Singapore warned its economy may grow 1 percent to 3 percent in 2012 after expanding 5 percent this year.

Carrefour slipped 3.2 percent to 17.84 euros after people familiar with the matter said shareholders may replace the retailer’s Chairman and CEO Lars Olofsson.

Groupe Arnault SAS and Colony Capital LLC, which hold a combined 16.15 percent of Carrefour and 22.14 percent of the voting rights, will give Olofsson until the end of the year to improve the company’s performance in its domestic and largest market, said the people, who asked not to be named as the discussions are private.

Adidas, Statoil Fall

Adidas AG (ADS) declined 3.2 percent to 48.69 euros after Welt am Sonntag reported the world’s second-largest sporting-goods maker will increase prices in 2012 because of higher raw-material prices and wage costs.

Statoil ASA (STL) slid 3.1 percent to 140.90 kroner even after Norway’s national oil company agreed to sell stakes in fields to Centrica Plc (CNA) for $1.6 billion. Statoil will dispose of stakes in eight fields on the Norwegian continental shelf, it said. Centrica’s shares lost 1 percent to 286.1 pence.

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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