German Stocks Decline as U.S. Manufacturing Contracts

German stocks declined to a three-week low as a report showed U.S. manufacturing unexpectedly contracted in May, and amid investor concern the Federal Reserve will reduce its debt-buying program.

Munich Re, the world’s biggest reinsurer, fell 2.5 percent, following its European peers lower as central Europe was hit by floods. TUI AG slipped 2.3 percent after a report cited its chief executive officer as saying the company’s future depends on cost reductions. Deutsche Lufthansa AG advanced as the International Air Transport Association forecast higher earnings for the industry.

The benchmark DAX Index retreated 0.8 percent to 8,285.8 at the close of trading in Frankfurt. The gauge rose 5.5 percent in May and has rallied in all but one of the past 12 months as central banks around the world maintained their stimulus efforts. The broader HDAX Index also lost 0.8 percent today.

“European equities are further consolidating after last week,” Ion-Marc Valahu, co-founder and fund manager at Clairinvest in Geneva, wrote in an e-mail. “Fears of quantitative easing being removed and poor macroeconomic numbers are driving down stocks and pushing up bond yields.”

Manufacturing in the U.S. unexpectedly contracted in May at the fastest pace in four years. The Institute for Supply Management’s factory index decreased to 49 from the prior month’s 50.7, the Tempe, Arizona-based group’s report showed today. Fifty is the dividing line between growth and contraction. The median forecast of economists surveyed by Bloomberg was 51.

Insurers Drop

Munich Re declined 2.5 percent to 141.10 euros, and Hannover Re, the world’s fourth-largest reinsurer, lost 3.3 percent to 56.39 euros.

Authorities are striving to cope with central-European floods similar to 2002, when high water in western Bohemia and Austria spread to Germany and costs insurers billions of dollars in damage claims.

U.S. property insurers seeking to manage their exposure to hurricanes and other disasters secured price cuts for annual reinsurance policies of 15 percent on average over the weekend, according to the Financial Times, which cited unidentified people with knowledge of the talks.

The yield in the benchmark 10-year German bund rose to 1.52 percent today. Yields have advanced from 1.17 percent on May 2, and rates for similar U.S. Treasuries climbed to 2.23 percent last week from 1.63 percent on concern the Fed may taper its bond-buying program.

“The insurance sector is very sensitive to violent moves in the bond-yield curve. In the last few weeks U.S. and European rates have moved higher quite sharply,” Valahu said.

TUI Costs

TUI, the owner of Europe’s largest travel company, retreated 2.3 percent to 9.25 euros. TUI’s “right to exist” hinges on cost cuts that include scrapping almost half the 190 jobs at its headquarters in Hanover, CEO Friedrich Joussen told the Frankfurter Allgemeine Zeitung newspaper in an interview.

Lufthansa, Europe’s second-biggest airline, rose 0.5 percent to 16.71 euros, paring earlier gains of as much as 1.8 percent. Airline earnings will be 20 percent higher this year than forecast just three months ago as capacity cuts help pack planes to record levels, IATA said.

Carriers are likely to generate net income of $12.7 billion in 2013, the industry group said today. That compares with a forecast of $10.6 billion issued on March 20, and represents a 67 percent gain on last year’s profit of $7.6 billion.

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