German Stocks Retreat Most in Two Weeks on Manufacturing

German stocks sank the most in two weeks as the nation’s manufacturing contracted more than expected, the Federal Reserve cut its U.S. growth forecast and factory output in the Philadelphia region shrank.

Volkswagen AG, the world’s second-largest carmaker, fell 3.1 percent. SAP AG, the biggest maker of enterprise software, dropped 2.7 percent. Deutsche Boerse AG, the operator of the Frankfurt stock exchange, declined 2 percent.

The DAX Index slid 0.8 percent to 6,343.13 at the close of trading in Frankfurt, the largest drop since June 4. The benchmark gauge has fallen 11 percent from its 2012 high on March 16 amid growing concern that Greece will be forced to leave the euro. The broader HDAX Index lost 0.7 percent today.

Fed officials cut their estimate for economic growth in 2012 to 1.9 percent to 2.4 percent, down from an April forecast of 2.4 percent to 2.9 percent. The central bank expanded its so-called Operation Twist program at the end of a two-day meeting yesterday, replacing $267 billion of short-term bonds with longer-term debt through the end of 2012.

“There is not a lot of flexibility for the Fed to do more so it is not surprising that the reaction to yesterday’s expansion of stimulus is not necessarily positive,” said Felicity Smith, a fund manager at Bedlam Asset Management in London. “You can’t just pump money into the system and hope that growth comes out the other end.”

Manufacturing Shrinks

A purchasing managers’ index compiled by Markit Economics showed that German manufacturing probably shrank for a fourth month in June. The PMI fell to 44.7 from 45.2 in May, missing the median economist forecast of 45.2 in a Bloomberg survey. Readings less than 50 indicate contraction.

In the U.S., Philadelphia manufacturing shrank in June at the fastest pace in almost a year. The Fed Bank of Philadelphia’s general economic index fell to minus 16.6 in June, the lowest level since August, from minus 5.8 the previous month. Economists forecast the gauge would improve to zero, the dividing line between growth and contraction, according to the median estimate in a Bloomberg News survey.

China’s manufacturing may decline for an eighth month in June, matching the streak during the global financial crisis in a signal the government’s stimulus has yet to reverse the economy’s slowdown, another survey by HSBC Holdings Plc and Markit Economics showed.

Spanish Bonds

The DAX earlier advanced as much as 0.6 percent as Spain sold 2.22 billion euros ($2.8 billion) of bonds, beating the 2 billion-euro maximum target.

Spain paid 4.706 percent to borrow for two years, compared with 2.069 percent at a similar auction in March. Demand for the April 2014 securities was 3.97 times the amount allotted, compared with 2.81 times in March. The so-called bid-to-cover ratios also climbed for the July 2015 and July 2017 securities offered today.

Preferred shares of Volkswagen fell 3.1 percent to 123.70 euros, snapping a four-day gain. SAP dropped 2.7 percent to 46.40 euros.

Deutsche Boerse declined 2 percent to 39.89 euros. The exchange is set to see “strong” second-quarter results on frenetic trading, based upon uncertainty in the euro area, according to Berenberg Bank. Still, tough comparisons lie ahead, particularly in August, Berenberg said.

Fresenius Medical Care AG, the world’s biggest provider of kidney dialysis, rose 1.1 percent to 54.69 euros.

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