U.K. Stocks Drop the Most in Three Months; Vodafone Falls

U.K. stocks tumbled the most in almost three months as Vodafone Group Plc retreated and Spanish and Italian bonds declined amid political uncertainty in both Mediterranean countries.

Vodafone, which accounts for 5.3 percent of the benchmark FTSE 100 Index, declined the most in more than two weeks as Citigroup Inc. downgraded the shares. Meggitt Plc slipped 2.6 percent after UBS AG lowered its recommendation on the shares. Salamander Energy Plc posted its biggest rally since March 2011 after discovering oil off the coast of Indonesia.

The FTSE 100 lost 100.4 points, or 1.6 percent, to 6,246.84 at the close in London, its biggest drop since Nov. 7. The equity benchmark has still gained 5.9 percent in 2013, its best start to a year since 1998, as U.S. lawmakers agreed on a compromise budget. The broader FTSE All-Share Index retreated

1.5 percent today, while Ireland’s ISEQ Index lost 1 percent.

“U.K. stocks have gone up a lot in January, earnings are being downgraded and there’s not a lot of news flow,” said Gerard Lane, a strategist at Shore Capital Group Ltd. in Liverpool, England. “Valuations have gone up from what they were before Christmas. It’s difficult to see how markets can drive on further without better news on the economy.”

The price-earnings ratio for the FTSE 100 climbed to 11.7 times estimated earnings on Feb. 1 from 11.5 at the beginning of December, according to data compiled by Bloomberg.

Spain, Italy

U.K. stocks extended their decline as Spanish and Italian 10-year bonds dropped for a second day. The yield on Italian debt rose 14 basis points to 4.47 percent after Prime Minister Silvio Berlusconi yesterday promised to give voters a 4 billion-euro ($5.4 billion) cash rebate if he regains power in the Feb. 24-25 elections.

Spain’s 10-year bond yield surged 23 basis points to 5.44 percent as opposition politicians called on Prime Minister Mariano Rajoy to resign following corruption allegations.

El Pais said last week that Rajoy or members of his People’s Party received illegal cash payments. The newspaper published what it said were handwritten extracts from ledgers detailing payments to party officials. Rajoy visits Berlin today before a European Union summit scheduled to begin on Thursday.

In China, the official non-manufacturing purchasing managers’ index rose to 56.2 in January from 56.1 in December, the National Bureau of Statistics and China Federation of Logistics and Purchasing said in a statement yesterday. A reading above 50 means that activity increased.

Bank Regulation

In the U.K., Chancellor of the Exchequer George Osborne said regulators will have the power the break up banks that don’t abide by rules intended to protect their retail operations, according to remarks released by his office. Osborne will add the powers to the Financial Services (Banking Reform) Bill due to be presented to Parliament this week. The British Bankers’ Association said the plan would mean banks have less money to lend.

Vodafone slid 1.7 percent to 170.5 pence, its biggest slide since Jan. 16, after Citigroup lowered its recommendation on the shares to neutral from buy. The brokerage cited pressure on revenue from the mobile-phone operator’s European businesses and the increased risk that it will acquire businesses.

Meggitt, Lonrho

Meggitt slipped 11.4 pence to 430 pence. UBS analysts Charles Armitage and Rami Myerson lowered their recommendation on the shares to neutral from buy, saying that the world’s largest provider of wheels and brakes for combat aircraft has little room to expand margins in the next five years.

Lonrho Plc plunged 22 percent to 6.95 pence, its biggest slump since March 2009. The industrial group focused on Africa said in a statement that it expects a full-year net operating loss of 3 million pounds ($4.7 million) to 5 million pounds.

Salamander Energy surged 12 percent to 208 pence after saying its South Kecapi-1 exploration well discovered oil.

Randgold Resources Ltd. jumped 3.1 percent to 6,275 pence after saying its annual dividend will increase by 25 percent to 50 cents a share. Production will climb by at least 13 percent in 2013, the mining company said in a statement.

The volume of shares changing hands on FTSE 100-listed companies was 14 percent greater than the average of the last 30 days, according to data compiled by Bloomberg.