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European Stocks Post Weekly Drop Amid Fed Stimulus Signs

European stocks posted their first weekly loss in more than a month as investors debated when the Federal Reserve will scale back momentary stimulus and Chinese manufacturing unexpectedly shrank.

FirstGroup Plc tumbled 43 percent after the U.K. bus and rail company halted its dividend and announced a rights offer to avert a credit downgrade. SAP AG, the largest maker of enterprise-management software, dropped the most in 21 months after changing its board structure. Bankia SA (BKIA), the nationalized Spanish bank, sank 85 percent before a debt swap next week.

The Stoxx Europe 600 Index fell 1.7 percent to 303.35 this week past, including the worst drop in 10 months on May 23 after Fed Chairman Ben S. Bernanke said the central bank will consider paring its stimulus measures if the U.S. economy improves. The gauge had climbed to the highest level since June 2008 before the selloff, bolstered by monetary policy and better-than-estimated U.S. economic data.

“Bernanke’s words had people start to worry,” Alberto Espelosin, who helps oversee $1.5 billion at Abante Asesores Gestion in Madrid, said in a phone interview. “We all know that the Fed will at one point have to reduce the level of purchases. It was a logical market reaction this week, given that indices were at record highs.”

The Standard & Poor’s 500 Index (SPX) fell 0.8 percent on May 22 as Bernanke said in testimony to Congress that the pace of asset purchases could be cut “in the next few meetings” if the economy improves. That was a departure from previous statements where he stressed that policy will remain “highly accommodative,” Kevin Logan, chief U.S. economist at HSBC Holdings Plc, wrote in a report to investors this week.

Japanese Losses

In Asia, Japan’s Nikkei-225 Stock Average (NKY) on May 23 posted the steepest retreat since the aftermath of the March 2011 tsunami and nuclear disaster as yields on the nation’s bonds rose. The index had surged 50 percent in 2013 before the drop, the best performance among 24 developed-market benchmarks tracked by Bloomberg, as the Bank of Japan stepped up the purchases of bonds to end deflation.

China’s manufacturing is contracting in May for the first time in seven months, a release showed. The preliminary reading of a purchasing managers’ index declined to 49.6 this month from 50.4 in April, HSBC and Markit Economics said. That missed the 50.4 median estimate in a Bloomberg survey. Fifty is the dividing line between expansion and contraction.

Even so, European economic data showed some improvement. A gauge of euro-area services and factory output increased more than economists forecast in May, adding to signs the region is starting to emerge from its record-long recession. German business confidence climbed for the first time in three months.

DAX Drops

Fifteen of the 18 western European benchmarks declined this week. Germany’s DAX Index (DAX) and the CAC 40 in France retreated 1.1 percent. The U.K.’s FTSE 100 Index lost 1 percent.

“We don’t think that it is anything else than a correction,” said Cyril Castelli, chief executive officer at Rcube SAS, a research and market strategy firm in Paris. “You have attractive valuations and a much better liquidity environment. There is potentially a large run-up in euro-zone equities and we would use the ongoing correction as a buying opportunity.”

The Stoxx 600 reached a valuation of 13.6 times estimated earnings on May 22, according to data compiled by Bloomberg, the highest since January 2010. Still, the weighted-average dividend in the Stoxx 600 as a percentage of share prices tops the yield on benchmark German bunds by more than 2 percentage points, Bloomberg data show.

FirstGroup, SAP

FirstGroup (FGP) plummeted 43 percent this week, the biggest drop since at least 1995. The company stripped of Britain’s premier U.K. rail route in 2012 had the largest one-day retreat in 18 years on May 20 after halting its dividend to focus on a 615 million-pound ($930 million) rights offer.

SAP declined 6.5 percent, the most since August 2011. The company changed its management structure as it focuses on the faster-growing parts of its business. The company said its cloud-computing chief and founder of SuccessFactors Inc., a software provider it bought last year, is leaving the company as part of the changes.

Bankia, the Valencia-based banking group that was bailed out with European aid last year, tumbled 85 percent. The lender will execute a debt swap on Tuesday that will practically wipe out existing stockholders plus a parallel rights offer that will raise 15.5 billion euros ($20 billion).

The Spanish regulator, CNMV, said it will investigate trading activity after 49.39 million Bankia shares changed hands on May 23, more than double its share capital of 19.93 million shares, as the stock plunged 51 percent.

Britvic, Metro

Britvic Plc, the U.K. maker of Robinsons Barley Water, rose the most in more than eight months on May 22 after saying it will shut factories and reduce staff after abandoning a merger with A.G. Barr Plc. Britvic shares gained 11 percent this week, while Barr slipped 0.2 percent.

Metro AG surged 8.3 percent, the most in six months, after Morgan Stanley recommended buying the stock for the first time in a decade. The brokerage cited the prospect of further disposals as Germany’s biggest retailer reorganizes.

Morgan Stanley increased its recommendation on Metro to overweight, equivalent to a buy rating, from equal weight and said the shares may climb to 33 euros apiece.

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net

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

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