European Stocks Fall on Mounting Concern Over U.S. Budget

European stocks dropped to a two- month low as U.S. President Barack Obama said Bush-era tax cuts for high earners should expire at the start of 2013 and the euro area entered its second recession in four years.

Zurich Insurance Group AG retreated 3.9 percent after Switzerland’s biggest insurer reported quarterly profit that missed analysts’ estimates. SBM Offshore NV (SBMO) and Man Group Plc (EMG) declined more than 5 percent after MSCI Inc. removed the shares from some of its indexes. Hennes & Mauritz AB (HMB) fell 3 percent after Europe’s second-largest clothing retailer said sales missed some estimates in October.

The Stoxx Europe 600 Index slid 1 percent to 265.52 at the close in London. The equity benchmark briefly fell below its closing level on Sept. 5, the day before the European Central Bank announced that it would buy the debt of countries that asked for its help. The gauge has still rallied 14 percent from this year’s low on June 4.

“The fiscal-cliff issue is more about increasing taxes and not about reducing spending,” said Andreas Nigg, head of equity and commodity strategy at Vontobel Asset Management in Zurich. “Even if a compromise on the cliff is found, it most likely won’t be until December, leaving November vulnerable.”

The Stoxx 600 has lost 3.4 percent since the re-election of President Barack Obama on Nov. 6 as investors turned their attention to the U.S. fiscal cliff, the $607 billion of tax increases and spending cuts that automatically come into force at the beginning of next year.

Tax Increases

Obama said yesterday that voters want to cut the budget deficit by imposing higher taxes on the wealthy and reducing spending. The president reiterated his call for Congress to pass an extension of the Bush-era tax cuts for the first $200,000 of annual income for individuals and $250,000 for married couples. Speaking at a White House news conference, he said the rates on earnings above those levels should rise when the cuts expire at the end of the year.

A report from the Labor Department showed that claims for unemployment benefits jumped to 439,000 last week from 361,000 in the previous week. That exceeded the median estimate in a Bloomberg survey.

A separate release today showed that manufacturing in the New York region contracted for a fourth straight month in November. The Federal Reserve Bank of New York’s Empire State index, which covers the city, northern New Jersey and southern Connecticut, climbed to minus 5.2 from minus 6.2 in October. Economists had forecast the measure would drop to minus 8.

Unemployment Claims

A report in Luxembourg showed that the combined economy of the 17-nation euro area contracted in the third quarter. Gross domestic product fell 0.1 percent, matching the median forecast of 44 economists in a Bloomberg News survey. It shrank 0.1 percent in second quarter. The second successive quarter of negative growth means that the economy has entered a recession.

“The euro zone as a whole has slipped back into recession,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, wrote in an e-mail. “Europe’s economic downturn has not only deepened, it has also broadened with the core of the euro zone now much more affected. The bleak economic data out of Europe will further undermine sentiment.”

National benchmark indexes declined in every western- European (SXXP) market except Spain. France’s CAC 40 slid 0.5 percent, while Germany’s DAX and the U.K.’s FTSE 100 both slipped 0.8 percent. Spain’s IBEX 35 added 0.3 percent.

Zurich Insurance

Zurich Insurance declined 3.9 percent to 223.10 Swiss francs. Third-quarter profit slumped 62 percent after the insurer wrote off $550 million following a review of its general-insurance business in Germany. Net income of $477 million missed the average analyst estimate of $707.5 million.

SBM Offshore sank 13 percent to 8.69 euros, Man Group slid 5.7 percent to 73.75 pence and GAM Holding AG (GAM) slumped 6.8 percent to 11.75 francs after MSCI removed the shares from some of its indexes, meaning funds that track the equity gauges will have to sell their shares. The changes will be implemented on Nov. 30 at the close.

The shares of SBM also tumbled as the company said it won’t meet its 2012 revenue forecast of $4 billion.

Davide Campari-Milano SpA (CPR), the maker of Cinzano wine, slipped 4.3 percent to 5.48 euros and John Wood Group Plc (WG/), the U.K. oil-services company active in Africa and the Middle East, slid 5.9 percent to 790.5 pence. Fuchs Petrolub AG (FPE) sank 5.5 percent to 50.87 euros. Exane BNP Paribas had predicted that MSCI would add the companies to its indexes.

H&M, Gategroup

H&M fell 3 percent to 213.10 kronor. Sales at stores open a year or more slid 5 percent last month, the company said in a statement. Richard Edwards, an analyst at Citigroup Inc. in London, had forecast sales would be unchanged.

Tesco Plc (TSCO), Europe’s biggest retailer by market capitalization, slipped 1.6 percent to 316.3 pence.

Royal Ahold NV, the Dutch owner of Stop & Shop grocery stores, lost 2.2 percent to 9.35 euros as third-quarter profit missed analysts’ projections.

Air France-KLM (AF) Group plunged 8.5 percent to 6.55 euros. Europe’s second-biggest airline by sales said it will complete the purchase of 25 Airbus SAS A350 planes in the first half of next year after delaying a contract because of arguments over engine maintenance.

Gategroup Holding AG (GATE) plunged 6.8 percent to 24 francs as the airline-catering business said nine-month net income fell to 16.9 million francs ($18 million) from 43.1 million francs a year earlier.

Natixis (KN) slumped 5.7 percent to 2.41 euros after Exane cut the stock to neutral, the equivalent of hold, from outperform. The brokerage said that financial results will probably cause analysts to lower their estimates.

Repsol SA gained 3.5 percent to 15.76 euros. Spain’s Foreign Minister, Jose Manuel Garcia-Margallo, said his government may soon reach an agreement with Argentina over the expropriation of YPF, Repsol’s unit in the Latin American nation.

To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net

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

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