European Stocks Retreat Amid Turmoil in Spain, Italy

European stocks tumbled the most in more than three months as Spanish and Italian banks retreated with the nations’ government bonds amid signs of returning political uncertainty in the region’s weakest economies.

Banco Santander SA, Spain’s largest bank, sank the most in six months as Prime Minister Mariano Rajoy denied corruption allegations. UniCredit SpA, the biggest lender in Italy, posted the largest drop since June as former premier Silvio Berlusconi gained in opinion polls before elections this month. Julius Baer Group Ltd. fell 3.1 percent after the wealth manager reported declining revenue margins.

The Stoxx Europe 600 Index retreated 1.5 percent to 283.9 at the close of trading, the largest decline since Oct. 23. The gauge has still increased 1.5 percent this year as U.S. lawmakers agreed to a compromise budget to prevent automatic spending cuts and tax increases that threatened to push the world’s largest economy into a recession.

“Spanish yields have blown up in the past hour to their highest levels since December as concerns about the Spanish government mount,” said Ioan Smith, a strategist at Knight Capital Europe Ltd. in London. “In addition to the growing corruption scandal in Spanish politics, the Italian elections towards the end of the month are also a concern.”

The volume of shares changing hands in Stoxx 600 companies was 16 percent greater than the 30-day average, according to data compiled by Bloomberg. The gauge is trading at 12.2 times its companies’ estimated earnings, compared with a valuation of 9.75 times profit in June, data shows.

VStoxx Jumps

The VStoxx Index, a measure of the price of using options to protect against declines in the Euro Stoxx 50 Index, surged 26 percent for the biggest jump since August 2011.

Stocks in the world’s developed nations had posted the best start to a year in two decades, as investors pumped record deposits into mutual funds, U.S. profits increased for an 11th quarter and central banks kept interest rates at record lows. The MSCI World Index of equities in 24 developed markets rose 5 percent in January, the most since 1994.

“We’ve had this fantastic surge on a general warm feeling that markets, and banks in particular, were past the worst,” James Ferguson, chief strategist at Westhouse Securities Ltd. in London, told Guy Johnson on Bloomberg Television today. “Now we are beginning to question that at much higher levels, which makes us vulnerable to a downturn.”

Benchmark Indexes

National benchmark indexes declined in all of the 18 western European markets, except Greece and Denmark. Italy’s FTSE MIB Index sank 4.5 percent, the most in six months. Spain’s IBEX 35 slid 3.8 percent for a sixth day of declines, the longest losing streak in 10 months. France’s CAC 40 plunged 3 percent for the biggest drop since April. The U.K.’s FTSE 100 dropped 1.6 percent and Germany’s DAX lost 2.5 percent.

Santander plunged 5.7 percent to 5.69 euros in Madrid while Banco Bilbao Vizcaya Argentaria SA fell 4.7 percent to 6.97 euros. Yields on Spanish 10-year securities climbed 23 basis points to 5.44 percent today as Rajoy denied corruption and strategists from Commerzbank AG recommended reducing holdings of the nation’s debt.

Newspaper El Pais last week published allegations of illegal cash payments, featuring extracts from handwritten ledgers by the former People’s Party Treasurer Luis Barcenas showing payments to officials including Rajoy. The premier, who is facing opposition calls to resign, visits Berlin today before a European Union summit begins on Thursday.

Berlusconi Pledges

In Italy, UniCredit tumbled 8.3 percent to 4.25 euros as UBS AG downgraded the shares to neutral from buy. Intesa Sanpaolo SpA, the nation’s second-biggest bank, retreated 5.4 percent to 1.38 euros.

The yield on 10-year Italian debt increased 14 basis points to 4.47 percent. Berlusconi yesterday promised to abolish a property tax valued at about 4 billion euros ($5.4 billion) if elected in the Feb. 24-25 ballot, in an effort to roll back austerity implemented by Prime Minister Mario Monti.

Baer fell 1.17 Swiss francs to 36.39 francs, paring the rally so far this year to 13 percent. Gross margin, or revenue generated from the bank’s 189 billion francs ($208 billion) of assets, fell to 94 basis points in the second half of last year from 104 basis points a year earlier as clients traded less.

Royal Imtech NV plunged 48 percent to 10.20 euros, the largest drop since at least 1989. The Dutch provider of infrastructure for stadiums said it may have to book writedowns of at least 100 million euros because of alleged irregularities at its Polish business.

Swatch Gains

Swatch Group AG added 5 percent to 543.50 francs, its highest price since at least 1993, after the biggest maker of Swiss watches reported a 26 percent increase in 2012 net income to 1.6 billion francs. That beat the average analyst estimate of 1.49 billion francs in a Bloomberg survey as the company produced more watches and took advantage of expanded production capacity at its factories.

Randgold Resources Ltd. advanced 3.1 percent to 6,275 pence as the producer of the precious metal in West Africa raised its dividend. The company increased the payout by 25 percent to 50 cents a share and forecast 2013 gold production of 900,000 to 950,000 ounces, topping the 842,000-ounce estimate from analysts at Bank of America Corp.