Europe Stocks Sink Most in 18 Months on Stimulus Outlook

Photographer: Ralph Orlowski/Bloomberg

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Photographer: Ralph Orlowski/Bloomberg

A trader monitors financial data on his computer screens beneath a display of the DAX Index curve at the Frankfurt Stock Exchange.

European stocks sank the most in more than 18 months after Federal Reserve Chairman Ben S. Bernanke said the central bank may end bond purchases next year if the economy strengthens in line with forecasts.

Rio Tinto Group and Renault SA led mining and automobile companies lower as a gauge of Chinese manufacturing fell. Swatch Group AG slid the most in almost 21 months after Swiss watch exports declined. Eurotunnel Group SA tumbled 12 percent after Les Echos reported the European Commission will demand a reduction in tolls to use the Channel Tunnel.

The Stoxx Europe 600 Index (SXXP) plunged 3 percent to 283.68 at the close of trading, the biggest retreat since Nov. 21, 2011. The benchmark measure has declined 8.7 percent since May 22, when Bernanke indicated the central bank could pare stimulus measures as the economy grows. The U.S. jobless rate will fall as low as 6.5 percent next year from 7.6 percent in May, the Fed forecast yesterday.

“The projection for the unemployment rate was adjusted downward, which gives an indication that the end of quantitative easing might be happening sooner rather than later relative to what people expected,” Raimund Saxinger, a fund manager at Frankfurt-Trust Investment GmbH, which oversees about $22 billion, wrote in a e-mail.

National benchmark indexes fell in every western European market, except Iceland. Germany’s DAX slid 3.3 percent and France’s CAC 40 lost 3.7 percent. The U.K.’s FTSE 100 (UKX) retreated 3 percent, the biggest drop since September 2011.

China Crunch

The MSCI Asia Pacific Index (MXAP) plunged 4.1 percent, the largest decline since March 2011, amid concern a credit crunch in China is worsening.

China’s benchmark money-market rates climbed to records today as the People’s Bank of China refrained from using reverse-repurchase agreements to address a cash crunch. The seven-day repurchase rate rose 2.7 percentage points to 10.77 percent in Shanghai, according to a daily fixing announced by the National Interbank Funding Center, the highest in data going back to March 2003.

“The rise in Shibor (SHIF3M) this morning and the accompanying interbank liquidity squeeze might have alerted market participants who were looking for an imminent easing from the BOC that this might not be so,” Saxinger wrote, referring to the Shanghai Interbank Offered Rate. “Hopes for a massive China recovery on the back of an expected monetary and fiscal stimulus might have to be reconsidered in this light.”

Volume, Volatility

All 19 industry groups retreated in the Stoxx 600 and all but 20 stocks slipped. The number of shares changing hands was 32 percent greater than the 30-day average, according to data compiled by Bloomberg. The VStoxx Index (V2X), which measures the cost of options hedging against moves in the Euro Stoxx 50 Index, surged 16 percent to the highest level since February.

The Fed will probably taper its stimulus measures later in 2013 and halt bond purchases around mid-2014 as long as the world’s largest economy performs in line with its projections, Bernanke told reporters yesterday in Washington after a two-day meeting of the Federal Open Market Committee.

The central bank said it will keep buying bonds at a pace of $85 billion a month, and repeated that it’s prepared to increase or reduce the pace of purchases depending on the outlook for the job market and inflation.

“The extreme levels of support provided by central banks to risk assets may be nearing a turning point,” Dennis Jose, an equity strategist at Barclays Plc in London, wrote in a report today. “Our economists now expect the Fed to start tapering asset purchases in September 2013. We advise caution near term, though the current high equity risk premium should cushion against an excessive decline in sentiment.”

Rio Tinto

A gauge of basic-resources shares was the second-worst performer on the Stoxx 600. Rio Tinto and BHP Billiton Ltd. (BLT), the world’s largest mining companies, lost 4.5 percent to 2,674.5 pence and 4.6 percent to 1,728.5 pence, respectively.

The preliminary reading of a Chinese purchasing managers’ index for June released today by HSBC Holdings Plc and Markit Economics was 48.3, missing economists’ estimates of 49.1. A number below 50 indicates contraction.

Randgold Resources Ltd. tumbled 7.5 percent to 4,296 pence as gold slid to the lowest since 2010. Polymetal International Plc, a Russian gold and silver producer, sank 12 percent to 541 pence, the lowest price since it sold shares in London in October 2011.

Renault and Bayerische Motoren Werke AG plunged 6.8 percent to 53.49 euros and 4.8 percent to 66.43 euros, respectively. Preferred shares of Volkswagen AG lost 4.1 percent to 153.10 euros. A gauge of automakers was the biggest decliner among the 19 industry groups in the Stoxx 600.

Watch Exports

Swatch, the biggest maker of Swiss watches, and Cie. Financiere Richemont SA, owner of the Cartier brand, fell 5.2 percent to 506.50 francs and 5.2 percent to 80.70 francs, respectively. Watch exports declined 3.9 percent in May from a year earlier, the Federation of the Swiss Watch Industry said.

Eurotunnel, operator of the Channel Tunnel between Britain and France, plunged 12 percent to 5.49 euros. Les Echos reported the European Commission will demand toll reductions as freight and passenger rates are seen as excessive.

Aberdeen Asset Management Plc (ADN), Scotland’s largest money manager, lost 7.9 percent to 368.5 pence as Goldman Sachs Group Inc. downgraded the stock to neutral from buy.

Ashtead Group Plc, the U.K. equipment-rental company, rose 5 percent to 658.5 pence, gaining for a fifth day, after posting earnings that beat estimates and raising its dividend.

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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