European Stocks Drop on Greek Deadlock, Merkel’s Setback

European stocks retreated, snapping two days of gains, as Greece moved closer to a possible exit from the euro currency union and German Chancellor Angela Merkel’s party lost a state election.

Banks paced losses, with HSBC Holdings Plc dropping 1.5 percent. Infineon Technologies AG, Europe’s second-largest semiconductor maker, retreated after Chief Executive Officer Peter Bauer decided to step down. ING Groep NV tumbled 6 percent as European Union regulators will reexamine its rescue by the Dutch government.

The Stoxx Europe 600 Index lost 1.8 percent to 247.43 at the close of trading. All 19 industry groups on the gauge fell. The Stoxx 600 has pared this year’s gains to 1.2 percent as an inconclusive election in Greece left political parties struggling to form a government, risking the collapse of proposed austerity measures.

“With no new Greek government in sight, I think that we will see continued insecurity and volatility in financial markets this week,” said Alessandro Fezzi, senior market analyst at LGT Capital Management AG in Pfaeffikon, Switzerland. The impasse “will lead us to new elections in June, which will prolong investors’ insecurity as they worry about possible contagion risks, especially regarding Spain.”

A European measure of implied volatility increased the most in three weeks. The VStoxx Index, a measure of Euro Stoxx 50 Index options prices, surged 12 percent to 31.69, its biggest jump since April 23.

Lack of Consensus

Greece’s President, Karolos Papoulias, failed to secure agreement on a unity government and avert new elections. Syriza, the left-wing group opposed to spending cuts, defied overtures to join the government yesterday.

Euro-area finance ministers meet today and may discuss the international bailout for Greece, as well as the situation in Spain, where the government last week began a fourth attempt to clean up the country’s banks. The ministers will convene at 5 p.m. in Brussels.

Meanwhile, the debate between growth and austerity will form the centerpiece of talks tomorrow between the newly installed French President Francois Hollande and Merkel, who has championed an agenda of spending cuts.

National benchmark indexes fell in all of the 18 western-European markets. The U.K.’s FTSE 100 declined 2 percent. France’s CAC 40 lost 2.3 percent. Germany’s DAX dropped 1.9 percent. Greece’s ASE Index plunged 4.6 percent to the lowest level since November 1992.

German Elections

Merkel’s party lost an election in Germany’s most populous state, helping the Social Democrats tighten their grip on the country’s regional governments.

The SPD, the main opposition party nationally, increased its share of the vote in yesterday’s ballot in North Rhine-Westphalia. Support for Merkel’s Christian Democratic Union fell to its lowest level since World War II.

Euro-area industrial production unexpectedly declined in March, as lower output in countries from Spain to France offset increased activity in Germany. Production slipped 0.3 percent from February. Economists had forecast a gain of 0.4 percent. From a year earlier, production declined 2.2 percent.

Spain’s borrowing costs rose at a bill auction. The nation sold 2.9 billion euros ($3.7 billion) of bills, just below its maximum target, and offered the most since December to lure investors as demand eased.

Italy auctioned 5.25 billion euros of debt as the Treasury reached the maximum set for the sale amid stronger demand.

Banks Decline

A gauge of European banking shares was among the second-worst performer of the 19 industry groups in the Stoxx 600. HSBC tumbled 1.5 percent to 545.8 pence. Deutsche Bank AG and BNP Paribas SA dropped 4.1 percent to 29.88 euros and 3.7 percent to 27.62 euros, respectively.

Bankia SA plunged 8.9 percent to 1.89 euros after the Spanish lender said provisions for soured property loans will be 115 times last year’s earnings.

Natixis SA retreated 5.5 percent to 2.03 euros after Sebastien Lemaire, an analyst at Societe Generale SA, reduced his recommendation on the stock to hold from buy.

Infineon dropped 3.4 percent to 6.67 euros after it said Bauer will step down because of “severely worsening” osteoporosis and named management-board member Reinhard Ploss as his successor from Oct. 1.

ING Groep, Nokia

ING Groep, the biggest Dutch financial service company, fell 6 percent to 4.91 euros after a weekend report said its rescue by the country’s government will be re-examined by EU competition regulators after a court overturned earlier approval of the aid.

Nokia Oyj declined 7.3 percent to 2.33 euros after Andy Perkins, an analyst at Societe Generale, downgraded the stock to sell from hold. This is the lowest price for stock since November 1996.

Lonmin Plc, the world’s third-largest platinum producer, slumped 5.2 percent to 854 pence after posting an unexpected first-half loss. The loss excluding one-time items was 6.9 cents a share in the six months through March. That compares with the median estimate for profit of 9 cents.

Chariot Oil & Gas Ltd. plunged 50 percent to 75 pence, its biggest decline since it sold shares to the public in May 2008, after failing to find hydrocarbons at the Tapir South exploration well offshore Namibia and abandoning the block.

Opap SA, the Greek gambling company, tumbled 12 percent to 5.15 euros, the lowest price since 2001, after Imerisia reported that the company’s agents have asked for a 30 percent commission on gross winnings from planned video lottery terminal games.

Invensys, Rank Group

Invensys Plc, the British maker of controls for washing machines and factory equipment, advanced 3.2 percent to 209 pence after the Sunday Times said the company is the target for potential bids from industrial groups including Siemens AG, ABB Ltd., Emerson Electric Co. and General Electric Co. The newspaper didn’t say where it obtained the information.

Rank Group Plc, the U.K. casino and bingo company, rose 5.8 percent to 123.5 pence after it conditionally agreed to buy the casino unit of Gala Coral Group Ltd. for 205 million pounds ($329 million).

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