European Stocks Post Weekly Drop; Santander, Saipem Slide

European stocks posted their biggest weekly decline this year as a report showed the U.S. economy unexpectedly shrank in the fourth quarter and Spain’s markets regulator lifted a ban on shorting equities.

Spanish banks led a gauge of European lenders lower, with Banco Santander SA and Bankia SA each dropping more than 7 percent. Saipem SpA plunged 36 percent, the most since at least 1989, after lowering its earnings forecasts for 2012 and 2013. Imagination Technologies Group Plc rallied 18 percent, the best performance on the Stoxx Europe 600 Index, after Morgan Stanley recommended buying the company’s shares.

The benchmark Stoxx 600 fell 0.5 percent to 288.2 this past week, its biggest drop since the end of 2012. The gauge has still advanced 3.1 percent so far this year after U.S. lawmakers agreed to a compromise federal budget that prevented spending cuts and tax increases from coming into force. The changes had threatened to push the world’s biggest economy into a recession.

“The U.S. GDP report was a negative surprise that weighed on markets, but investors did calm down after the initial shock,” said Joerg Lorenz, a senior fund manager who oversees about $560 million at Zuercher Kantonalbank in Zurich. “Most markets need a break to digest the gains. Looking forward, economic data indicate the bottom is behind us. This will contribute to a stabilization on the markets in the mid-term.”

Contracting Economy

The U.S. economy contracted for the first time since the second quarter of 2009. Gross domestic product dropped at a 0.1 percent annual rate, a Commerce Department release showed on Jan. 30. That compared with the median estimate of 83 economists surveyed by Bloomberg that called for a 1.1 percent expansion. A report from the Labor Department showed that the unemployment rate increased to 7.9 percent from 7.8 percent.

A separate release showed that U.S. house prices increased 5.5 percent in the year through November, their biggest year-on-year gain since August 2006.

Spanish banks slumped, with Banco de Sabadell SA plunging 14 percent and Bankia tumbling 25 percent, as the country’s stock-market regulator, known as CNMV, said on Jan. 31 that it wouldn’t extend a ban on shorting stocks.

Short sellers sell borrowed shares with the intention of buying them back later at a lower price, a practice some politicians and investors blame for increasing market turbulence. Spain’s IBEX 35 Index had soared 40 percent from its low last year through Jan. 31.

Santander’s Earnings

Santander lost 7.7 percent after the country’s largest lender set aside money for further loan losses in its home market. The bank reported fourth-quarter profit of 401 million euros ($549 million), missing the average analyst estimate of 801.6 million euros.

National benchmark indexes retreated in 12 of western Europe’s 18 markets this week. France’s CAC 40 dropped 0.1 percent, while the U.K.’s FTSE 100 Index added 1 percent. Germany’s DAX slipped 0.3 percent and Spain’s IBEX 35 slumped 5.7 percent, its biggest slide since September.

Saipem plunged 36 percent. Europe’s largest oil-services company by sales lowered its forecast for earnings before interest and taxes in 2012 to about 1.5 billion euros. Ebit will fall to about 750 million euros in 2013, the company said. It predicted that earnings from onshore projects would slump by about 80 percent this year.

Other companies that provide engineering services to oil companies slid on concern that the announcement signaled profit would fall across the industry. Technip SA slipped 4.5 percent and Subsea 7 SA declined 4.4 percent.

Monte Paschi

In Italy, Banca Monte dei Paschi SpA dropped 11 percent. The lender facing a criminal probe into money-losing structured deals had its credit rating cut by Standard & Poor’s on concern the investigation may lead to bigger losses. The Siena-based bank had its long-term grade lowered to BB from BB+. S&P reiterated its negative outlook on the company.

Antofagasta Plc, the copper producer controlled by Chile’s Luksic family, fell 7.8 percent after forecasting increased costs this year. The expense of mining a pound of copper will increase 14 percent to 185 cents in 2013, the company said.

Imagination Technologies rallied 18 percent. Morgan Stanley upgraded the British maker of chip technology for phones and tablet computers to overweight, the equivalent of buy, from equal weight. The brokerage said the shares will surge as much as 27 percent if Imagination gains access to the Chinese market and wins a contract to design chips for Samsung Electronics Co.’s Galaxy S4.

Swedbank AB jumped 12 percent as the second-best capitalized major lender in the European Union proposed a dividend of 9.90 kronor a share, compared with 5.30 kronor a year earlier. The lender posted net income of 4.34 billion kronor ($690 million) in the fourth quarter, beating the 3.54 billion-krona average analyst estimate in a Bloomberg survey.

William Hill Plc gained 7.9 percent after the bookmaker said full-year net revenue grew by 12 percent. The company, which will release its final results on March 1, forecast operating profit of 330 million pounds ($519 million).