European Stocks Drop Amid Reports of S&P Downgrades in Euro Area

European stocks declined for a third day, with the benchmark Stoxx Europe 600 Index trimming a weekly advance, after reports that Standard & Poor’s is close to downgrading several euro-area countries.

Vodafone Group Plc led losses, falling to a three-week low. Novartis AG dropped after saying it will take $1.22 billion of charges. Invensys Plc slumped 19 percent after revealing 60 million pounds ($92 million) in additional costs. Commerzbank AG rose after German newspaper Handelsblatt reported that the lender will raise its capital without seeking government aid.

The Stoxx 600 slipped 0.1 percent to 249.18 in London. The gauge still gained 0.7 percent this week as borrowing costs dropped at sovereign-bond auctions in the euro area.

“It’s not as if we didn’t know that several European countries were going to be downgraded,” said Angus Campbell, head of sales at Capital Spreads in London. “When the rumor comes, you get a knee-jerk reaction, and sometimes you can get a rebound once the rumor is confirmed.”

The downgrades may happen as soon as today, according to government officials and people familiar with the matter. Germany’s rating will not be cut, they said.

French Rating

S&P is stripping France of its AAA credit rating for the first time, Agence France-Presse reported, citing an unidentified government official. French President Nicolas Sarkozy’s spokesman Franck Louvrier declined to comment on reports today that the government has been notified by S&P of a cut in the country’s rating.

European stocks fell in the past two days as the German economy shrank in the final quarter of 2011 and data on U.S. retail sales and initial jobless claims missed forecasts.

The Stoxx 600 earlier advanced as much as 0.7 percent after Italy sold 4.75 billion euros ($6.1 billion) of bonds, its maximum target. Borrowing costs fell at the country’s second auction this week. The Treasury sold 3 billion euros of benchmark securities due in November 2014 to yield 4.83 percent, down from 5.62 percent at the previous sale on Dec. 29.

Italy raised 12 billion euros yesterday, selling Treasury bills. Spain and Germany also this week received more bids than the amounts they targeted in their debt sales.

Consumer Sentiment

A report showed consumer sentiment in the U.S. rose more than forecast. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment for January increased to 74 from 69.9 at the end of December. The gauge was projected to rise to 71.5, according to the median estimate in a Bloomberg News survey.

National benchmark indexes declined in 14 of 18 western European markets. France’s CAC 40 Index slipped 0.1 percent. The U.K.’s FTSE 100 Index dropped 0.5 percent, while Germany’s DAX Index lost 0.6 percent.

European Central Bank President Mario Draghi said in Frankfurt yesterday his strategy for battling Europe’s debt crisis is starting to work and that there are “tentative signs” of economic stabilization in the euro area.

The European Banking Authority will this year postpone the annual stress test for banks usually published in July, Handelsblatt reported, citing a spokeswoman for the EBA.

The test will be delayed to allow time for banks to get fresh capital to fill gaps documented by the last stress test in December, the newspaper said. The test may be postponed to the autumn or not happen at all this year, Handelsblatt said.

Creditor Banks

Talks between Greece and its creditor banks were put on hold after negotiations in Athens failed to yield an agreement. A proposal put forward by the steering committee representing financial firms has “not produced a constructive consolidated response by all parties,” the Institute of International Finance said.

Vodafone dropped 2.5 percent to 175 pence, the lowest since Dec. 22.

“We see potential weakness due to top line in Europe,” Morgan Stanley analysts wrote about Vodafone in a report, saying they prefer rival BT Group Plc.

Novartis fell 0.7 percent to 53 Swiss francs. The drugmaker said it will cut 1,960 jobs in the U.S. and take $1.22 billion of charges to prepare for generic competition to its best-selling blood pressure pill Diovan and lower sales potential of the Tekturna drug.

Trading in Zurich was delayed due to a technical fault and started at noon local time.

Additional Costs

Invensys plummeted 19 percent to 183.2 pence, the biggest fall since February 2003. The British maker of washing-machine controls and factory gear revealed 60 million pounds in additional costs to fulfill contracts.

Full-year earnings will be “significantly” below last year as a result of the expenses, the company said.

Air France-KLM Group, Europe’s biggest airline, dropped 1.1 percent to 4.24 euros after freezing pay checks and hiring to cut costs by 1 billion euros, while beginning productivity talks with unions aimed at delivering a similar saving it says is needed to secure the long-term future.

Commerzbank, Germany’s second-biggest lender, rose 3.4 percent to 1.42 euros, pacing gains in European banks. The lender plans to raise its capital level by mid-year without seeking direct or indirect aid from the German state, its biggest shareholder, Handelsblatt reported, citing unidentified people close to the government.

BNP Paribas SA, the biggest lender in France, rose 2.5 percent to to 31.79 euros.

Royal Bank of Scotland Group Plc, which yesterday announced its decision to cut its European investment bank by more than a quarter, climbed 4.8 percent to 24.1 pence.

GN Store Nord jumped 10 percent to 56.75 kroner after saying its DPTG unit and TPSA have reached a 550 million-euro agreement to settle a dispute on traffic volumes carried over a fiber optical telecommunications system in Poland. GN Store Nord said its entitled to receive 75 percent of the amount.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE