European Stocks Post Weekly Drop on Valuation, China

European stocks fell in the second week of 2013 amid the highest valuation in 11 quarters for the benchmark Stoxx Europe 600 Index and concern that quickening inflation in China will limit the scope for economic stimulus.

Salzgitter AG (SZG) led a gauge of commodity shares lower. Debenhams Plc (DEB) lost 9.9 percent after the retailer cut its profit-margin forecast. Banco Popolare SC led banks higher after global central-bank chiefs eased a liquidity rule.

The Stoxx 600 dropped 0.3 percent to 287.08 this past week. The index rallied 3.3 percent in the week through Jan. 4, the biggest gain since Nov. 23, as U.S. lawmakers approved a compromise budget that avoided most scheduled tax increases and delayed spending cuts in the world’s largest economy.

“Monetary policy has less punch in the beginning of 2013 than in the fourth quarter of last year, so one important equity driver is gearing down,” said Witold Bahrke, who helps oversee $55 billion as senior strategist at PFA Pension A/S in Copenhagen. “Now it’s up to the economic momentum to take over. Tactical indicators are at an extreme and political uncertainty is still an important risk factor.”

The price-earnings ratio for the Stoxx 600 (SXXP) reached 19.1 times reported earnings, its highest level since March 2010, according to data compiled by Bloomberg.

Chinese Economy

Reports from China showed a measure of manufacturing expanded in December for a third month, exports increased at almost three times the rate economists had estimated and the inflation rate accelerated to a seven-month high in the world’s second-largest economy.

The quickening rate of price increases point to tighter monetary policy, a stronger currency to curb imported inflation, less liquidity and higher interest rates in the second half of the year, said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB.

German exports declined more than forecast in November, a report showed on Jan. 8. Exports adjusted for working days and seasonal changes fell 3.4 percent from October, the steepest drop in more than a year, the Federal Statistics Office in Wiesbaden said. Economists in a Bloomberg survey had forecast a 0.5 percent decrease.

National benchmark indexes retreated in eight of the 18 western European markets this week. France’s CAC 40 (CAC) dropped 0.6 percent, while the U.K.’s FTSE 100 added 0.5 percent. Germany’s DAX lost 0.8 percent.

Mining Companies

A gauge of commodity producers declined 3.3 percent this week, for the worst performance among the 19 industry groups on the Stoxx 600. The index ranked 16th in segment returns in 2012.

Salzgitter, Germany’s second-largest steelmaker, slumped 7.6 percent. The stock was downgraded to neutral from outperform at Credit Suisse Group AG, which said European construction activity and demand for steel tubes may not increase.

Nomura Holdings Inc. said Jan. 9 that the immediate outlook for steel remains unclear.

Voestalpine AG (VOE) lost 6 percent after Morgan Stanley called Austria’s biggest steelmaker “less attractive,” saying the company’s growth plans will consume more of its cash flow. The bank cut its recommendation on the stock to equal weight, a rating similar to hold, from overweight.

Debenhams slid 9.9 percent. The U.K.’s second-largest department-store chain cut its forecast for full-year margin growth as it expanded sales promotions.

Tullow Write-Off

Tullow Oil Plc, the U.K. explorer focusing on Africa and Latin America, tumbled 7 percent after saying it more than doubled 2012 write-offs related to unsuccessful wells in Ghana, Guyana and Suriname. Also, Investec Bank Plc on Jan. 8 recommended investors sell the shares because of project delays in Uganda and Ghana.

Getinge AB, a Swedish maker of sterilization systems sold in more than 100 countries, plunged 10 percent after saying fourth-quarter revenue was hurt by weakening demand in Europe.

A gauge of bank shares was the best performer this week, gaining 4.3 percent. Central-bank chiefs at a meeting in Basel, Switzerland on Jan. 6 allowed lenders to use a wider range of assets to meet the so-called liquidity coverage ratio. The group of regulators also gave banks an extra four years to fully comply with the measure.

Banco Popolare SC (BP), Italy’s fourth-biggest bank by assets, rallied 16 percent. Banco Espirito Santo SA (BES) jumped 15 percent. Credit Agricole SA (ACA) and Societe Generale SA (GLE) surged 12 percent each.

Delta Lloyd NV surged 16 percent, for the biggest gain on the Stoxx 600 this week. Aviva Plc sold its remaining 19.4 percent stake in the Dutch insurance company for 433.8 million euros ($568 million). UniCredit SpA added 9.9 percent.

Phone Companies

A gauge of telecommunications shares gained 2 percent. Mobile-phone operators including Deutsche Telekom AG and France Telecom SA discussed the creation of a pan-European network with Competition Commissioner Joaquin Almunia, the Financial Times reported, citing people familiar with the matter.

Vodafone Group Plc (VOD) rose 3.2 percent. Verizon Communications Inc. Chief Executive Officer Lowell McAdam said his company has the strength to buy Vodafone’s stake in their U.S. joint venture Verizon Wireless, the Wall Street Journal reported.

Royal KPN NV, the biggest Dutch phone company, advanced 14 percent. Portugal Telecom SGPS SA (PTC) climbed 8.9 percent and Cable & Wireless Communication Plc added 7.7 percent.

To contact the reporter on this story: Tom Stoukas in Athens at astoukas@bloomberg.net

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

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