European stocks fall as contagion fears rise

European stock markets fell Monday, along with the euro currency, as fears grew that the threat of euro-zone debt contagion may be spreading to Italy, prompting investors to flock to the dollar and core European government bonds. Escalating concerns of another debt crisis brewing in Italy, appear to be hitting market sentiment with investors worried the country’s banks may not pass the stress test due July 15. Late Sunday, Italy’s stock-market regulator, Consob, introduced temporary measures aimed at curbing speculative attacks on the Milan stock market, responding to Friday’s wave of selling that hit Italian bank stocks. The new measures, which oblige market operators to disclose short-selling moves above certain levels, will be effective Monday and remain in force until Sept. 9. Concerns around Italian banks are having clear spin-off impacts on the sovereign issuer, as outright yields break higher, said Lloyds Corporate Markets. By 0805 GMT, Italy’s sovereign credit default swap spread was 30 basis points wider at 279 basis points. In the European bond market, the September bund futures contract made a new contract high of 127.98, around 0.53 ticks higher on the day, and by 0819 GMT, the contract was up 0.42 ticks at 127.85. Meanwhile, the euro fell against the dollar, fetching $1.4152 from $1.4265 late Friday in New York. The dollar was at Y80.77, compared with Y80.68. “The market essentially remains concerned about whether Italy can generate the growth necessary to pull itself out of its current debt problems...it is hard to judge how market sentiment will develop, but the rise in Italian yields, if it continues, will provide a much more serious problem for the European Union to deal with than the three bailouts so far,” added Lloyds. European equities felt the pinch, with the banking sector posting some of the strongest losses as traders continued to fret about the outcome of the EU bank stress tests results, in particular a group of five Italian banks that underwent a stress test. By 0815 GMT, the Stoxx Europe 600 banks index had fallen 1.2% to 177.66. On the Euro Stoxx 50 index, France’s Societe Generale shares fell 3.2%, while BNP Paribas lost 3.1%. Italy’s Intesa Sanpaolo fell 1.6%. Overall, the Stoxx Europe 600 index fell 0.4% at 272.61. London’s FTSE 100 was down 0.2% at 5978.88, Frankfurt’s DAX slipped 0.7% to 7348.32 and Paris’s CAC-40 was 0.9% lower at 3877.56. Within the EU ‘periphery,’ Italy’s FTSE MIB index lost 0.6%, while Greece’s ASE index fell 1.7%. Spain’s IBEX 35 was down 1.0%, while Portugal’s PSI 20 index shed 1.8%. As a result of contagion fears, EU officials have scheduled an emergency meeting in Brussels Monday. This is a situation that is likely to put a lot of pressure quickly on European officials to address the current issues in a more systemic, long-term and fundamental way, said Barclays Capital. “Indeed, the risk and costs of contagion to Spain and Italy are such that a vicious circle can not be allowed to take hold,” it added. Among Monday’s corporate stories, auto stocks posted strong losses after French car maker Renault said Monday its worldwide vehicle sales rose 1.9% in the first half from a year earlier, held back by weak sales in Europe due to supply constraints that caused the car maker to miss out on some 50,000 sales in the region. Shares in Renault fell 1.5%, while the Stoxx Europe 600 sector for autos lost 1.3%. The biggest faller on London’s FTSE 100 index was British Sky Broadcasting Group, which dropped 6.9%. The stock has now fallen around 17% from last Monday’s close amid worries that a proposed takeover by News Corp. will hit the rocks following a phone-hacking scandal at News of the World, a tabloid newspaper which was shut down by News Corp. last week. News Corp. also owns Dow Jones & Co., publisher of this newswire, and The Wall Street Journal. On the slight upside, Swiss food and beverage giant Nestle shares rose 0.2%, after the group said it is seeking to buy a 60% stake in Chinese candy maker Hsu Fu Chi International Ltd. for about $1.7 billion, in what could be one of the largest foreign takeovers of a Chinese company. Earlier, stocks across Asia were lower Monday with Australian shares falling on concerns over a carbon tax plan, while the Shanghai market consolidated in a narrow range as investors digested the latest inflation data. Japan’s Nikkei Stock Average was down 0.7%, Australia’s S&P/ASX 200 fell 1.4%, while South Korea’s Kospi Composite was 1.0% lower. The Shanghai Composite Index was up 0.2%, but Hong Kong’s Hang Seng Index lost 1.7%. Regional sentiment was hurt by Friday’s disappointing U.S. payrolls report and weekend data from China showing consumer price index rose 6.4% year-on-year in June, quicker than a 5.5% rise in May, and the biggest monthly rise since June 2008. Additionally, Australian shares were hit hard by concerns of the carbon policy under which the government would implement a fixed price of A$23 per carbon ton emitted from the country’s 500 biggest polluters starting in mid-2012. Among commodities, spot gold was at $1,545.90 per troy ounce, up $5.20 from its New York settlement Friday. August Nymex crude oil futures were down $1.22 at $94.98 per barrel. Looking ahead to Monday’s economic agenda, no major European economic data is due, while in the U.S., the Federal Reserve’s release of meeting minutes is expected to be the only highlight, due 1800 GMT. Market participants will also gear up for the start of the second- quarter earnings season in the U.S. Monday, with Alcoa kicking off with figures after the closing bell on Wall Street later in the global day.