European Stocks Retreat as U.S. Government Shutdown Looms

European stocks declined the most in a month, trimming the best quarter in four years, as the U.S. faced the first government shutdown in 17 years and Italian Prime Minister Enrico Letta fought to save his administration.

UniCredit SpA and Intesa Sanpaolo SpA (ISP), Italy’s biggest banks, dropped more than 1 percent as the nation’s benchmark FTSE MIB Index slid 1.2 percent. Rio Tinto Group led mining companies lower after a measure of Chinese manufacturing missed a preliminary estimate. Aryzta AG rallied the most in six months as the Swiss supplier of bakery products reported results that topped projections.

The Stoxx Europe 600 Index fell 0.6 percent to 310.46 at the close of trading, the biggest drop since Aug. 30. The gauge has still climbed 4.4 percent in September as the Federal Reserve held off from trimming its monthly asset purchases. It has surged 8.9 percent since the end of June for the largest quarterly gain since the third period of 2009.

“Risk appetite is on the retreat, driven by the political drama on both sides of the Atlantic,” Witold Bahrke, who helps oversee $55 billion as a senior strategist at PFA Pension A/S in Copenhagen, wrote in an e-mail. “Dysfunctional governments are the root of the problem, which means heightened political uncertainty will be the dominating theme, reversing the equity-friendly sentiment from the first half of September.”

U.S. Shutdown

The U.S. government is heading for its first partial shutdown since 1996 at midnight tonight, after a weekend with no signs of negotiations or compromise from either the House of Representatives or Senate to avert it.

The House voted 231-192 yesterday to tie an extension of government funding through Dec. 15 to a delay in many central provisions of President Barack Obama’s health-care changes. The Senate convened in Washington today and will probably reject the deferral to Obamacare.

A federal shutdown would reduce fourth-quarter economic growth by as much as 1.4 percentage points, depending on its length, economists said, as government workers from park rangers to telephone receptionists are laid off temporarily. The Office of Management and Budget estimated 30 days of shutdowns in 1995 and 1996 cost more than $1.4 billion, or $2.09 billion in today’s dollars.

In Italy, Letta said he’ll request a confidence vote for Oct. 2 to try to save his five-month-old administration after Silvio Berlusconi withdrew his support from the ruling coalition and pulled his ministers from cabinet. Yields on the nation’s 10-year bonds rose two basis points to 4.43 percent.

Italian Banks

UniCredit (UCG), Italy’s largest bank, lost 1.3 percent to 4.71 euros. Intesa Sanpaolo, which appointed Carlo Messina as chief executive officer to replace Enrico Tommaso Cucchiani yesterday, fell 3.5 percent to 1.53 euros. Mediaset SpA, the broadcaster controlled by Berlusconi, dropped 4.5 percent to 3 euros, the lowest price since July 3.

A gauge of basic-resources shares fell 0.9 percent. Rio Tinto and BHP Billiton Ltd., the world’s biggest mining companies, retreated 1.4 percent to 3,023 pence and 1.1 percent to 1,820 pence, respectively. Anglo American Plc lost 1.4 percent to 1,518 pence.

A Chinese manufacturing gauge rose to 50.2 for September from 50.1 in August, according to a purchasing managers’ index from HSBC Holdings Plc and Markit Economics. The reading missed the preliminary estimate of 51.2. Fifty is the threshold between contraction and expansion.

National benchmark indexes retreated in all 18 western European markets. The U.K.’s FTSE 100 (UKX) and Germany’s DAX each lost 0.8 percent, while France’s CAC 40 Index slid 1 percent.

Volume Gains

The volume of shares changing hands in companies listed on the Stoxx 600 was 8.6 percent higher than the average of the past 30 days, according to data compiled by Bloomberg.

Stora Enso Oyj, which had climbed 17 percent from May 31 through last week’s close, tumbled 5.4 percent to 6.27 euros as UBS AG lowered its recommendation on Europe’s biggest paper maker to sell from neutral. The stock’s rally was partly driven by speculation of a merger with UPM-Kymmene Oyj, a deal that is unlikely to get antitrust clearance from the European Union, analyst David Hallden wrote in a note.

UPM-Kymmene (UPM1V), a rival maker of paper, dropped 1.9 percent to 10.23 euros.

Aryzta surged 4 percent to 60.45 Swiss francs, the biggest gain since March 28. The owner of bakery brands including Delice de France and Otis Spunkmeyer posted full-year revenue of 4.5 billion euros ($6.1 billion), beating analysts’ estimates of 4.43 billion euros. The company also forecast a double-digit percentage gain in 2014 earnings.

Telecom Italia

Telecom Italia SpA (TIT) rose 5.2 percent to 61 euro cents amid speculation Chief Executive Officer Franco Bernabe will resign. Bernabe plans to tell the board at a meeting scheduled for Oct. 3 that he’s ready to step down after losing the backing of Telco SpA, the Telefonica SA-led holding company that owns 22.4 percent of the carrier, according to a person with knowledge of the matter, who asked not to be identified because the deliberations are confidential.

Groupe Eurotunnel SA surged 6.7 percent to 6.74 euros, the highest price since March 2012. France and the U.K. will reject the European Commission’s request to lower the company’s fees for passengers and freight trains using the Channel Tunnel, Reuters reported on Sept. 27, citing Chief Executive Officer Jacques Gounon. Today is the deadline for the two countries to respond to the commission, according to Reuters.

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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